Country B is a closed economy with no government and a fixed aggregate price level. There are only two sources of aggregate demand, consumer spending and investment spending. In country B, we have that aggregate disposable income Yd, equals GDP. b. Suppose you are told that the aggregate consumption function is C=500+0.5Yd, and the planned investment, IPlanned, is 100. What is the MPC? What is the slope and y-intercept of the AEPlanned curve ?
What will be an ideal response?
Answer:
MPC=slope of aggregate consumption function =0.5
AEPlanned = C+ IPlanned = 500+0.5YD+100 = 600+0.5YD, and slope of aggregate expenditure function is the MPC, that is, the slope is 0.5; and the y-intercept of the aggregate expenditure curve is 600.
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