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) Every $50 billions increase in Y leads to increase in C by $20 billion.

=> Change in Y = $50 billions

=> Change in C = $20 billions

MPC = Change in C / Change in Y

MPC = ($20 billions / $50 billions)

MPC =0.4

(b)

Y (Billions of $)	C (Billions of $)	Planned investment (IP) (Billions of $)	G (Billions of $)	NX (billions of $)	Planned Aggregate expenditure (PAE, billions of $)
350	200	60	90	60	410
400	220	60	90	60	430
450	240	60	90	60	450
500	260	60	90	60	470
550	280	60	90	60	490

PAE = C + Ip + G + NX

This type of expenditure is called planned aggregate expenditure.

(c)

Y (Billions of $)	C (Billions of $)	Planned investment (IP) (Billions of $)	G (Billions of $)	NX (billions of $)	Planned Aggregate expenditure (PAE, billions of $)	Unplanned investment (Billions of $)
350	200	60	90	60	410	-60
400	220	60	90	60	430	-30
450	240	60	90	60	450	0
500	260	60	90	60	470	30
550	280	60	90	60	490	60

Unplanned investment = Y - PAE

(d) At equilibrium level; Y = PAE.

Therefore, equilibrium level of aggregate expenditure is $450 billlions.

(e)

Y (Billions of $)	C (Billions of $)	Planned investment (IP) (Billions of $)	G (Billions of $)	NX (billions of $)	Planned Aggregate expenditure (PAE, billions of $)	Unplanned investment (Billions of $)	Future tendency
350	200	60	90	60	410	-60	Increase
400	220	60	90	60	430	-30	Increase
450	240	60	90	60	450	0	same
500	260	60	90	60	470	30	decrease
550	280	60	90	60	490	60	decrease

If Y < PAE or unplanned investment is negative then there is increase in Y in future.

If Y > PAE or unplanned investment is positive then there is decrease in Y in future.