Suppose that we are in an economy with international trade, the government, domestic consumption, and investment. The government retains a tax rate of 10%. Suppose that we observe this economy at two levels of national income (Y) ceteris paribus: (i) Y = 1,000 and (ii) Y = 1,800. The amounts for each of these desired expenditure categories at each of these levels of Y are given by: At Y = 1,000: Consumption = 1,000 Government Spending = 550 Investment = 150 Imports = 100 Exports = 150 At Y = 1,800: Consumption = 1,560 Government Spending = 550 Investment = 270 Imports = 180 Exports = 150 Based upon this data, answer the following questions. We will keep referring to four categories – these are Consumption (C), Investment (I), Government Spending (G), and Net Exports (NX).
Question 3. In this case, write down the function for each of the four categories as a function of national income (Y). These should be generally in y = mx + b form (although m or b may be zero for some). Question 4. In the previous question, you have solved for how Consumption varies with National Income. Recall though that with a tax rate (10%), National Income (Y) does not equal disposable income (YD) for consumer. Therefore, what is consumers’ marginal propensities to consume in this example? Round to two decimal places.
Question 5. Combine these into the Aggregate Expenditure Function (AEF). Do two things: (i) write down the function for the AEF and (ii) plot the AEF with Y on the x-axis, and AEF on the y-axis. Label the value for the y-intercept and include the 45o line also.