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 = $244 billion + (0.13)Y
B) C = $244 billion + (0.87)Y
C) C = $300 billion + (0.13)Y
D) C = $356 billion + (0.87)Y
E) C = $356 billion + (0.13)Y

Question

Quizplus · Accepted Answer

The aggregate expenditure function is given by AE = $300 billion + (0.87)Y, where Y is the income. Desired investment is given as autonomous and is equal to $56 billion. Therefore, the total expenditure in the economy is given by AE = C + I, where I is the autonomous investment which is $56 billion.

Substituting the value of AE, we get:

AE = C + I 
$300 billion + (0.87)Y = C + $56 billion 
C = $244 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