Question

3. For the table shown, answer the following questions:

Actual aggregate expenditure or output (Y) (billions of $)	Consumption (C) (billions of $)	Planned investment (billions of $)	Government spending (G) (billions of $)	Net exports (NX) (billions of $)	Unplanned investment (inventory change) (billions of $)	Future output tendency
350	200	60	90	60
400	220
450	240
500	260
550	280

1. What is the marginal propensity to consume for households in this economy?
2. Based on the assumptions of our aggregate expenditure model, fill in the columns for planned investment, government spending, and net exports. What is this type of expenditure called?
3. For each level of actual aggregate expenditure, calculate unplanned inventory investment.
4. What is the equilibrium level of aggregate expenditure in this economy? How do you know?
5. For each level of actual aggregate expenditure, label the future output tendency as “increase,” “decrease,” or “same” based on what you expect to happen to future output. What relationship does this categorization have to your answer in part d?

Answer 1

a. MPC is calculated in the attached image.

b. The level of government expenditure, planned investment will stay the same for each level of income. These types of expenditure are called autonomous expenditure. This is because they do not depend on the level of income.

c. Solved in attached image.

d. The equilibrium level of income is the level where actual aggregate output becomes equal to planned aggregate expenditure. Thus, $450 billion is the level of aggregate expenditure.

e. The tendencies are given in detail in the attached image. These tendencies can be predicted on the basis of the unplanned inventories. The level of actual output where the unplanned investory investment is positive, it means that the actual output in the future is going to increase. It will decrease where this investment is negative and will stay the same if unplanned inventory investment is zero.