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Macro Economic Assignment

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ECON 1002 Macroeconomics
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Tutorial 4 Equilibrium and the Aggregate Expenditures Model

In this tutorial we return to Funland (from LA2 in Module 4) and explore the concept of equilibrium with the Aggregate Expenditure model.
Please note you will learn this conceptual material by doing it yourself. Copying answers from friends will mean you do not really learn which will then be a big disadvantage for you in the mid-semester test.

Suppose that Funland people consume 75 cents for every extra dollar they earn (and conversely save 25 cents for each extra dollar). Assume that autonomous consumption is $200 (i.e. what is spent regardless of income). Assume there is no external sector and no government expenditure yet, so Aggregate Expenditure is just C+I.

1. What is the formula for the consumption function?
C = Cauton + ɑ(Y)

C = 200 + 0.75Y

Assume the Funland Bureau of Statistics employ you as an economist to complete the following table (Table One). They want to model what will happen if there is a planned $100 million of investment injection for that year. Because they know the consumption function they can work out the consumption level at different income levels. Savings can also be calculated because in this simple economy what is not consumed from income Y becomes savings (S).

2. Complete the missing cells in the table. The formula from i. will give you the C numbers. From this you can calculate Aggregate Expenditure You can then deduce S. After a few cells you will see a regular arithmetic pattern emerging, consistent with the marginal propensity to consume (ɑ).

3. What is the marginal propensity to consume (ɑ) ? ΔC/ ΔY = 150 / 200 = 0.75

4. What is the marginal propensity to save? ΔS/ ΔY 50 / 200 = 0.25

Table One
|Y |C |Savings | I (planned | AE = C+I

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