Question

Consider the data presented in the table:

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 (does it increase, decrease, or stay the same?)
350	200	60	90	60		(Click to select)  increase  decrease  same
400	220					(Click to select)  increase  decrease  same
450	240					(Click to select)  increase  decrease  same
500	260					(Click to select)  increase  decrease  same
550	280					(Click to select)  increase  decrease  same

a. What is the marginal propensity to consume for households in this economy? Instructions: Enter a numerical value rounded to two decimal places as necessary: ____

b. Based on the assumptions of our aggregate expenditure model, fill in the columns for planned investment, government spending, and net exports.

Instructions: Enter numerical values into the table. Enter whole numbers only.

What is this type of expenditure called?

• Autonomous expenditure

• Equilibrium expenditure

• Income-dependent expenditure

• Dependent expenditure

c. For each level of actual aggregate expenditure, calculate unplanned inventory investment. Instructions: Enter numerical values into the table. Enter whole numbers only. If the value is negative, you must enter a minus sign: ___

d. What is the equilibrium level of aggregate expenditure in this economy? Instructions:  Enter a numerical value rounded to two decimal places as necessary: ____

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. Instructions: Fill in the last column of the table.

f. At the equilibrium level of aggregate expenditure, which of the following are true? Instructions: Click each box to empty the box and then click each box to select the correct answers. There may be more than one correct answer.

check all that apply

• Firms have no incentive to change the level of their output.
• Unplanned investment is positive.
• Unplanned investment is zero.
• Consumption is maximized.

Answer 1

(a)

MPC = Change in C / Change in Y = (220 - 200) / (400 - 350) = 20 / 50 = 0.4

(b)

Planned investment, Government spending and Net exports are exogenous and fixed. So,

This is Autonomous expenditure.

(c)

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

Y	C	I	G	NX	Unplanned Inventory Investment	Future Output
($ Billion)	($ 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

(d)

In equilibrium, Unplanned inventory investment = 0

Therefore,

Y = AE = $450 billion

(e)

If Unplanned inventory investment is positive, Future output decreases.

If Unplanned inventory investment is negative, Future output increases.

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

(f)

Therefore in equilibrium, Unplanned investment is zero.