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 national income?

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

c. Using your answer from part (b), what would be the change in equilibrium national income if desired investment increased to 250? Can you show this in your diagram?

d. Now suppose household wealth increases from10 000 to 15 000. What happens to the *AE *function and by how much does national income change?

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