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# AE=GDP Watch

1. Hi guys,

kinda stuck on this question.

In the economy of Zip, the marginal propensity to consume is 0.75.
Investment is 50 billion, autonomous consumption is 20 billion, govern-
ment expenditures on goods and services are 40 billion, and autonomous
taxes are 40 billion.

(a) If Zip has no exports, no imports and no income taxes, write the
consumption function and calculate the equilibrium expenditure

I got the consumption function C=20+0.75Y which I think is correct but I am stuck on calculating equilibrium expenditure.

I'm aware that equilibrium expenditure = planned aggregate expenditure = gdp, so AE=GDP where AE=Ao+zY.

For autonomous expenditure i've got £110 billion, all i'm stuck on is zY which is induced expenditure, I know i'm meant to use MPC as it's to do with the multiplier effect but not sure on the correct method. Edit: have an answer. As Y = Ao / (1 - z)... Ao + z(Ao/(1-Z)) = AE = Y.. therefore 110 + 0.75(110/(1-0.75)) => Equilibrium expenditure= £440 billion (multiplier is 4).

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Updated: April 9, 2013
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