Consider a simple aggregate expenditure model where all components of aggregate expenditure are autonomous except consumption. If the consumption function is
C = $500 + 0.8Y, planned investment = $200, government purchases = $300,
Net exports = $100, and real GDP = $1,000, what is the amount of induced expenditures?
A) $500
B) $800
C) $1,100
D) $1,900

Question

Quizplus · Accepted Answer

Autonomous expenditures = investment + government purchases + net exports 
= $200 + $300 + $100 = $600

Planned aggregate expenditure = autonomous expenditures + induced expenditures 
Real GDP (Y) = planned aggregate expenditure

Therefore, induced expenditures = Y - autonomous expenditures 
= $1,000 - $600 
= $400

However, since consumption is not fully autonomous and depends on income, we need to calculate consumption expenditure based on the given consumption function: 
C = $500 + 0.8Y 
= $500 + 0.8($1,000) 
= $1,300

Planned aggregate expenditure = C + I + G + NX 
= $1,300 + $200 + $300 + $100 
= $1,900

Induced expenditures = planned aggregate expenditure - autonomous expenditures 
= $1,900 - $600 
= $1,300

But we need to subtract the autonomous consumption from this to get the induced expenditure: 
Induced expenditure = $1,300 - $500 
= $800

Therefore, the amount of induced expenditures is $800.

Consider a Simple Aggregate Expenditure Model Where All Components of Aggregate