a) Imagine an economy defined by the following: C = 140 + 0.

9 (Yd)
Where, 140 is autonomous consumption, 0.9 is the marginal propensity
to consume, and Yd is disposable (i.e. after tax income). Yd = Y- T,
where Y is national income (or GDP) and T = Tax Revenues = 0.3Y;
note that 0.3 is the average income tax rate. I = Investment = 400 G =
Government spending = 800 X = Exports = 600
1) Determine the aggregate expenditure function?
2) Suppose that, investment rises to 500. Calculate the equilibrium
output?
3) Calculate the government expenditure multiplier?
The aggregate expenditure function is given by:

AE = C + I + G + X

Substituting the consumption function and the given values for I, G, and X, we get:

AE = (140 + 0.9(Y - 0.3Y)) + 400 + 800 + 600

Simplifying:

AE = 140 + 0.9(0.7Y) + 1800

AE = 1940 + 0.63Y

Therefore, the aggregate expenditure function is AE = 1940 + 0.63Y.

If investment increases to 500, then the new equation for AE becomes:

AE = (140 + 0.9(Y - 0.3Y)) + 500 + 800 + 600

Simplifying:

AE = 1440 + 0.9(0.7Y) + 500 + 800 + 600

AE = 3340 + 0.63Y

To find the equilibrium output, we set AE equal to Y:

Y = 3340 + 0.63Y

0.37Y = 3340

Y = 9027.03

Therefore, the equilibrium output is approximately 9027.03.

The government expenditure multiplier is defined as the change in equilibrium output resulting from a
one-unit increase in government spending. In this case, the government expenditure multiplier is given
by:

Multiplier = ΔY / ΔG

To find ΔY, we can use the formula from part 2 to find the equilibrium output with a higher value of G:

Y1 = 3340 + 0.63Y

Y2 = 3340 + 0.63(Y + ΔY)

Subtracting the two equations, we get:

ΔY = (Y2 - Y1) / 0.63

ΔY = (3340 + 0.63(Y + ΔY)) - (3340 + 0.63Y)

ΔY = 0.63ΔY

ΔY = ΔG * multiplier

Solving for the multiplier, we get:

multiplier = ΔY / ΔG = 1 / (1 - 0.63(0.3))

multiplier = 1.63

Therefore, the government expenditure multiplier is 1.63.

b) Draw a graph which represents the above equilibrium level income

and expenditures.

(b) Sure! Here's a graph that represents the equilibrium level of income and expenditures:

The x-axis represents real GDP or national income, and the y-axis represents aggregate expenditures
(AE). The AE line is upward sloping, indicating that as national income increases, so do expenditures. The
point where the AE line intersects with the 45-degree line represents the equilibrium level of income
and expenditures, which in this case is approximately 9027.03. At this point, aggregate expenditures
equal national income, so there is no pressure for the economy to change.