Y - AD on 45-degree line AD c, + I(r) + G +X 45° Output (income), Y Note: AD = c, + c,(1 – t)Y + I(r) + G +X- my AD is the Aggregate Demand Function where CO is the autonomous part of consumption spending, C1 is marginal propensity to consume, and (1-t)Y is the disposable income. I = I where Investment spending is a function of the real interest rate(r). G is the government spending and t represents tax rate. X is exports and mY is the imports where m represents marginal propensity to import. Choose the INCORRECT statement: A lower propensity to import increases equilibrium output A higher propensity to consume leads to higher equilibrium output A lower propensity to consume makes the AD curve steeper A lower interest rate leads to higher equilibrium output O o o O Aggregate demand, AD

Y - AD on 45-degree line AD c, + I(r) + G +X 45° Output (income), Y Note: AD = c, + c,(1 – t)Y + I(r) + G +X- my AD is the Aggregate Demand Function where CO is the autonomous part of consumption spending, C1 is marginal propensity to consume, and (1-t)Y is the disposable income. I = I where Investment spending is a function of the real interest rate(r). G is the government spending and t represents tax rate. X is exports and mY is the imports where m represents marginal propensity to import. Choose the INCORRECT statement: A lower propensity to import increases equilibrium output A higher propensity to consume leads to higher equilibrium output A lower propensity to consume makes the AD curve steeper A lower interest rate leads to higher equilibrium output O o o O Aggregate demand, AD

Economics For Today

10th Edition

ISBN:9781337613040

Author:Tucker

Publisher:Tucker

Chapter18: The Keynesian Model

Section: Chapter Questions

Problem 9SQP

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Consider a closed economy with no government, where aggregate demand is determined by autonomous consumption, investment (which is independent of output), and the marginal propensity to consume. a) Given that autonomous consumption is 20, investment is also 20, and the marginal propensity to consume is 0.6, write out an equation for aggregate demand (AD) in this economy. b) Given this aggregate demand equation, and the equilibrium equation Y = AD, use algebra to find the equilibrium level of Y. (2 marks) c) Draw a diagram with output (Y) on the x-axis and aggregate demand (AD) on the yaxis. Draw two lines on this diagram: (i) Y = AD, and (ii) the aggregate demand function from part (a). Label the intercept of the AD line, and the point where the two lines intersect, with numerical values. d) Suppose that the marginal propensity to consume falls from 0.6 to 0.5. What would the new equilibrium level of Y be? Illustrate your answer in the diagram you drew for part (c). e)…
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