Assume the economy is closed and there is no government. The aggregate demand components are described below:C = 100 + 0.6Y (1)I = 200 (2)Now there is a boost in investment, and total investment is now 300. What is the autonomous spending of equilibrium?
Question
Assume the economy is closed and there is no government. The aggregate demand components are described below:C = 100 + 0.6Y (1)I = 200 (2)Now there is a boost in investment, and total investment is now 300. What is the autonomous spending of equilibrium?
Solution
In a closed economy with no government, the equilibrium level of income (Y) is determined where aggregate demand equals aggregate supply. In this case, aggregate demand is the sum of consumption (C) and investment (I).
Given the consumption function C = 100 + 0.6Y and the initial investment I = 200, aggregate demand (AD) is:
AD = C + I AD = (100 + 0.6Y) + 200 AD = 300 + 0.6Y
Now, if investment increases to 300, the new aggregate demand (AD') is:
AD' = C + I' AD' = (100 + 0.6Y) + 300 AD' = 400 + 0.6Y
In this case, the autonomous spending is the part of aggregate demand that does not depend on income, which is the sum of autonomous consumption and autonomous investment.
So, the autonomous spending of equilibrium after the boost in investment is 400.
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