In the Canadian economy, autonomous consumption expenditure is $50 billion, investment is $200 billion, and government expenditure is $250 billion. The marginal propensity to consume is 0.7 and net taxes are $250 billion. Exports are $500 billion and imports are $450 billion. Assume that net taxes and imports are autonomous and the price level is fixed.
a. What is the consumption function?
b. What is the equation of the AE curve?
c. Calculate equilibrium expenditure.
d. Calculate the multiplier.
e. If investment decreases to $150 billion, what is the change in equilibrium expenditure?
f. Describe the process in part (e) that moves the economy to its new equilibrium expenditure.