Final answer:
The Aggregate Expenditure (AE) in the closed economy of Strangetopia, with no government spending, taxes, or consumption out of income, and with adjustments made for a high real interest rate, would be $10.
Step-by-step explanation:
To calculate Aggregate Expenditure (AE) in the closed economy of Strangetopia, we need to consider the components provided: autonomous consumption, autonomous investment, and the effect of the real interest rate on consumption and investment. In Strangetopia, autonomous consumption is given as $10, and autonomous investment is also $10. There is no government spending or taxation, and households save all of their income, which implies no additional consumption out of income.
Considering the responsiveness rates of consumers and investors to the real interest rate, which are both 0.5, and knowing the real interest rate is 100%, we can adjust autonomous consumption and investment for the interest rate effects. The adjustments are as follows:
- For consumption: $10 - (0.5 * real interest rate effect on consumption) = $10 - (0.5 * 1 * $10) = $5
- For investment: $10 - (0.5 * real interest rate effect on investment) = $10 - (0.5 * 1 * $10) = $5
If household savings are the entire income and there's no additional consumption from income, the consumption function is flat at the level of autonomous consumption adjusted for the real interest rate.
Therefore, the aggregate expenditure (AE) in this economy would be:
AE = Adjusted Consumption + Adjusted Investment = $5 + $5 = $10