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Fact 11.5.1
An economy has a consumption function of C = 10 + 0.8Y, investment equal to 6, government expenditure equal to 10, exports equal to 10, and an import function of M = 0.1Y.
-Refer to Fact 11.5.1.If autonomous consumption increases by 10, what is the new equation of the aggregate expenditure function for this economy?
A)AE = 36 + 0.7Y
B)AE = 46 + 0.7Y
C)AE = 46 + 0.9Y
D)AE = 26 + 0.7Y
E)AE = 46 + 0.8Y

Question

Quizplus · Accepted Answer

Autonomous consumption increasing by 10 means that the consumption function is now C = 20 + 0.8Y. Therefore, the new equation for aggregate expenditure function is AE = C + I + G + NX, where NX is (X-M) or (10 - 0.1Y). Substituting the values, we get AE = (20 + 0.8Y) + 6 + 10 + (10 - 0.1Y) = 46 + 0.7Y. Thus, the correct answer is (B).

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