Question

Consider the data presented in Table 28P-1.

a. What is the marginal propensity to consume for households in this economy?

b. 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?

c. For each level of actual aggregate expenditure, calculate unplanned inventory investment.

d. What is the equilibrium level of aggregate expenditure in this economy? How do you know?

e. 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?

Table 28P-1

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

Answer 1

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 $)	Aggregate or planned expenditure (billions of $)	Unplanned investment (inventory changes ) (billions of $)	Future output tendency
350	200	60	90	60	410	(350-410)= -60	Increase
400	220	60	90	60	430	(400-430)= -30	Increase
450	240	60	90	60	450	0	Equilibrium
500	260	60	90	60	470	(500-470)=30	Decrease
550	280	60	90	60	490	(550-490)= 60	Decrease

(a) Marginal propensity to consume , MPC = (change in consumption/ chnage in Y) = 20/50 = 0.5.

(b) Planned investment , government spending and net exports are autonomous expenditure because these are fixed at each level of GDP.

(c) Unplanned investment is the difference between the actual output and aggregate expenditure.

(d) Aggregate expenditure = C + I + G + NX

Equilibrium expenditure is where aggregate expenditure equal actual expenditure and we can see from the table that it is when actual output is $450 billion.

(e) When aggregate expenditure is more than actual output , then inventories will decline, which implies negative unplanned investment .As a result firms will expand their production to get their inventories back to normal levels.

And when aggregate expenditure is less than actual output , then inventories will accumulate, which implies positive unplanned investment. As a result firms will reduce production.