in a closed economy with no government, where aggregate demand is determinedby autonomous consumption, investment (which is independent of output), and themarginal propensity to consume.a) Given that autonomous consumption is 20, investment is also 20, and the marginalpropensity to consume is 0.6, write out an equation for aggregate demand (AD) in thiseconomy. b) Given this aggregate demand equation, and the equilibrium equation Y = AD, usealgebra to find the equilibrium level of Y. 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 demandfunction from part (a). Label the intercept of the AD line, and the point where the twolines intersect, with numerical values. (3 marks)d) Suppose that the marginal propensity to consume falls from 0.6 to 0.5. What wouldthe new equilibrium level of Y be? Illustrate your answer in the diagram you drew forpart (c). (2 marks)e) Calculate the value of the Keynesian multiplier when the marginal propensity toconsume is (i) 0.6 and (ii) 0.5.
in a closed economy with no government, where aggregate
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.
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. (3 marks)
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). (2 marks)
e) Calculate the value of the Keynesian multiplier when the marginal propensity to
consume is (i) 0.6 and (ii) 0.5.
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