Question

In a certain economy, the components of planned spending are given by:

C = 500 + 0.8(Y - T) - 300r
Ip = 200 - 400r
G = 200
NX = 10
T = 150

Given the information about the economy above, which expression below gives autonomous expenditures?


A. [910 - 700r]
B. [760 - 700r]
C. 0.8Y
D. [790 - 700r]

Answer 1

B) 790-700r

Step-by-step explanation:

Aggregate Expenditure is the expenditure by all the sectors of economy. By Households = Consumption (C), By Firms = Investment (I), By government = Govt spending (G) & tax leakages (T), By Rest world = Next Exports (NX).

Autonomous Expenditure is the level of expenditure in economy, which doesn't depend on level of Income = Y.

AE = C + I + G + NX

[500 + 0.8 (Y-150) - 300r] + [200 - 400r] + 200 + 10

500 + 0.8Y - 120 - 300r + 200 - 400r + 210

500 - 120 + 200 + 210 - 300r - 400r + 0.8y

790 - 700r + 0.8y

As, it can be seen that the part of AE = '790 - 700r', excluding '0.8y' : is not dependent on Income Y. So, it is Autonomous Expenditure