Question

1. 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 $)
500	300	150	100	50
600	350
700	400
800	450
900	500

1. For each level of actual aggregate expenditure, calculate unplanned inventory investment.
2. What is the equilibrium level of aggregate expenditure in this economy? How do you know?
3. Suppose that planned investment increases by $50 billion. What is the new equilibrium level of aggregate expenditure in this economy?
4. What is the marginal propensity to consume in this economy?

What is the expenditure multiplier in this economy

Answer 1

a)

b) The equilibrium level of aggregate expenditure in this economy $700 billion. Because At yhis level of AE, the Real GDP is equal to AE.

c)

The new equilibrium level of aggregate expenditure in this economy is $800 billion.

d) Marginal Propensity to Consume (MPC) = Change in C / Change in Y = 50 / 100 = 0.5.

Expenditure multiplier = 1 / (1 - MPC) = 1 / (1 - 0.5) = 2.