In Econland autonomous consumption equals 700, the marginal propensity to consume equals 0.80, net taxes are fixed at 50, planned investment is fixed at 100, government purchases are fixed at 100, and net exports are fixed at 40. The slope of the Expenditure Line is:
A) 0.20.
B) 0.80.
C) 0.90.
D) 0.99.

Question

Quizplus · Accepted Answer

The equation for the expenditure line is:

Y = C + I + G + NX

Y = 700 + 0.8(Y-T) + 100 + 100 + 40

Simplifying:

Y = 1940 + 0.8Y - 0.8T

Y - 0.8Y = 1940 - 0.8T

0.2Y = 1940 - 0.8T

Y = (1940 - 0.8T)/0.2

The slope of the expenditure line is the coefficient in front of Y, which is equal to 1/0.2 = 5.

Therefore, the slope of the expenditure line is 5 or 0.80.

The answer is B.

In Econland Autonomous Consumption Equals 700, the Marginal Propensity to Consume