Illustrate what would happens to the ae func­tion

Question

Draw the aggregate expenditure function, calculate the equilibrium level of nationalincome, shift in the aggregate expenditure function.

Consider an economy characterized by the following equations:

C = 500 + 0.75 V + 0.05 W 1 = 150

where C is desired consumption, / is desired invest­ment, W is household wealth, and V is national income.

a. Suppose W = 10 000. Draw the aggregate expendi­ture function on a scale diagram along with the 45°line. What is the equilibrium level of nationalincome?

b. The marginal propensity to spend in this economyis 0.75. What is the value of the multiplier?

c. Using your answer from part (b), what would bethe change in equilibrium national income ifdesired investment increased to 250? Can youshow this in your diagram?

d.Now Assume household wealth increases from10 000 to 15 000. Illustrate what would happens to the AE func­tion and by how much does national incomechange?