Draw a Graph of an Economy's Aggregate Expenditure Function

question 60

Essay

Draw a graph of an economy's aggregate expenditure function. Using this graph, explain how equilibrium income is determined. Show graphically the effect on the equilibrium level of output if government spending and taxes are increased by the same amount. Explain why the balanced-budget multiplier equals 1.

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Definitions:

Externalities

Costs or benefits that affect a party who did not choose to incur that cost or benefit, often leading to market failure if not corrected by government intervention.

Marginal Cost

The boost in expenditure due to producing an additional unit of a product or service.

Coase Theorem

A principle that suggests that if trade in an externality is possible and there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights.

Private Parties

Individuals or entities that operate privately, not part of or affiliated with government organisations.