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

Output	Consumption	Investment	G	NX	Planned AE	Unplanned	Future
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

a) Marginal popensity to consume = 0.4

MPC is calculated as change in consumption/ change in income. At every level, income increases by 50 and consumption increases by 20. So,

MPC = (220 - 200)/ (400 - 350) =20/ 50 =0.4  

b) The columns for planned investment, government spending, and net exports have been filled. This type of expenditure is called planned aggregate expenditure.

c)  Unplanned inventory investment is calculated by the forumula: Output - planned aggregate expenditure.

The column has been filled with the values obtained.

d) The equilibrium level of aggregate expenditure in this economy is $ 450 billion (highlighted row). We know this becaue at that level, output = planned aggregate expenditure.

e) The future output tendency is filled in the table in the last column. It is the difference between output and planned aggregate expenditure. If we get a negative value, then the output has to 'increase' to meet the deficit. If the value is equal, then there needs to be no change in the output. If the value is positve, then the output may 'decrease'.