Question

In: Economics

For the table shown, answer the following questions: Actual aggregate expenditure or output (Y) (billions of...

  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 $)

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?

Solutions

Expert Solution

(a)

MPC = Change in Consumption / Change in GDP = (220 - 200) / (400 - 350) = 20 / 50 = 0.4

(b)

Planned investment, G and NX are exogenously given and are constant.

This is called Planned Autonomous expenditure.

Y C I G NX Unplanned Inventory Future Output
($ Billion) ($ Billion) ($ Billion) ($ Billion) ($ Billion)
350 200 60 90 60 -60 Increase
400 220 60 90 60 -30 Increase
450 240 60 90 60 0 Same (No Change)
500 260 60 90 60 30 Decrease
550 280 60 90 60 60 Decrease

(c)

Unplanned inventory = Y - AE, where AE = C + I + G + NX, computed above.

(d)

In equilibrium,

Unplanned inventory investment = 0

Hence

Y = AE = $450 billion

(e)

If Unplanned inventory investment > 0, Future output decreases.

If Unplanned inventory investment < 0, Future output increases.

If Unplanned inventory investment = 0, Future output is unchanged.

So, In equilibrium, Unplanned investment is zero.


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