Consider the following aggregate expenditure function: AE = $300 billion + (0.87)Y.Assuming that we have no government,no international trade and desired investment is autonomous and is equal to $56 billion,then which of the following is the correct statement of the consumption function?
A)C = $356 billion + (0.87)Y
B)C = $356 billion + (0.13)Y
C)C = $244 billion + (0.87)Y
D)C = $244 billion + (0.13)Y
E)C = $300 billion + (0.13)Y

Question

Quizplus · Accepted Answer

Since there is no government spending and no international trade, the only components of aggregate expenditure are consumption and investment. We know that desired investment is autonomous and is equal to $56 billion. Therefore, AE = C + I = $56 billion + (0.87)Y + $300 billion. Solving for C, we get: C = AE - I = $356 billion + (0.87)Y - $56 billion = $300 billion + (0.87)Y. Therefore, the correct statement of the consumption function is C = $244 billion + (0.87)Y.

Consider the Following Aggregate Expenditure Function: AE = $300 Billion