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. I_P is autonomous and the consumption function is C = $1,000 billion + 0.5Y. If Y= $6,000 billion, what is the value of consumption and planned investment? A) C = $3,000 billion, I_P = $3,000 billion B) C = $4,000 billion, I_P = $2,000 billion C) C = $5,000 billion, I_P = $1,000 billion D) C = $6,000 billion, I_P = zero

Question

Quizplus · Accepted Answer

Given Y = $6,000 billion and C = $1,000 billion + 0.5Y, we can solve for C as follows: C = $1,000 billion + 0.5Y C = $1,000 billion + 0.5($6,000 billion) C = $1,000 billion + $3,000 billion C = $4,000 billion Since AE = C + I_P, we can solve for I_P as follows: AE = C + I_P AE - C = I_P I_P = AE - C I_P = $6,000 billion - $4,000 billion I_P = $2,000 billion Therefore, the answer is B, with consumption equal to $4,000 billion and planned investment equal to $2,000 billion.