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 $)	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 = 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.