Difficulty: Medium Figure 13-4
-Refer to Figure 13-4. Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption,
I_P = Planned Investment. Suppose AE = C + I_P, and I_P is autonomous. What is the value of AE when Y = $12,000 billion?

Question

Difficulty: Medium Figure 13-4

-Refer to Figure 13-4. Let Y = real GDP, AE = Aggregate Expenditures, C = Consumption,
I_P = Planned Investment. Suppose AE = C + I_P, and I_P is autonomous. What is the value of AE when Y = $12,000 billion?

Quizplus · Accepted Answer

When Y = $12,000 billion, we are looking for the level of aggregate expenditures (AE). We know that AE = C + I_P. Since I_P is autonomous, it does not depend on the level of real GDP Y. Therefore, we can find AE by plugging in the value of Y into the consumption function C. From the graph, we see that the consumption function intersects the 45-degree line at Y = $9,000 billion. This means that consumption spending when Y is $12,000 billion is C = $9,000 billion. So, AE = C + I_P = $9,000 billion + I_P. We don't know the exact value of I_P, but we know that it is positive (since it is autonomous investment). Therefore, AE must be greater than $9,000 billion. The only answer choice greater than $9,000 billion is B) $9,000 billion, so that must be the answer.