Final answer:
The AE curve equation is AE = 20 + 0.6Y. Equilibrium expenditure is $50 billion. The multiplier is 2.5, and the shift of the aggregate demand curve with a $1 billion increase in investment is $2.5 billion.
Step-by-step explanation:
Understanding the Expenditure-Output Model
In an economy with a fixed price level, autonomous spending is given as $20 billion, and the slope of the AE curve, which represents the marginal propensity to consume (MPC), is 0.6. The equation for the AE (Aggregate Expenditure) curve can be expressed as AE = autonomous spending + MPC(Y), where Y is the national income.
A. The equation of the AE curve would be AE = 20 + 0.6Y.
B. Equilibrium expenditure occurs where AE equals Y. Setting AE equal to Y gives us 20 + 0.6Y = Y, which simplifies to 0.4Y = 20. Solving for Y yields an equilibrium expenditure of $50 billion.
C. The multiplier is calculated as 1/(1 - MPC). Since MPC is 0.6, the multiplier is 1/(1 - 0.6) = 1/0.4 = 2.5.
D. An increase in investment by $1 billion causes a shift in the aggregate demand curve. The total increase in demand, due to the multiplier effect, is 2.5 times the increase in investment, resulting in a shift of $2.5 billion.