Work It Out Chapter 11(26)

Question 1 of 4

Work It Out

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You must read each slide, and complete any questions on the slide, in sequence.

The accompanying table shows gross domestic product (GDP), disposable income (YD), consumer spending (C), and planned investment spending (I_Planned) in an economy. Assume there is no government or foreign sector in this economy.

Complete the table by calculating planned aggregate spending (AE_Planned) and unplanned inventory investment (I_Unplanned).

GDP	YD	C	*I_Planned*	*AE_Planned*	*I_Unplanned*
(billions of dollars)
$0	$0	$100	$300	$	$
400	400	400	300
800	800	700	300
1,200	1,200	1,000	300
1,600	1,600	1,300	300
2,000	2,000	1,600	300
2,400	2,400	1,900	300
2,800	2,800	2,200	300
3,200	3,200	2,500	300

Table

AE_Planned is the sum of consumption and I_planned. So when C is $100 and I_planned is $300 then AE_Planned is $400. The remaining values of AE_Plannedare found by adding C and I_plannedfor all levels of GDP. You can find I_Unplanned as the difference between disposable income and AE_planned. When GDP is $0, I_Unplannedis -$400 ($0 - $400). You can find the remaining values of I_Unplanned by taking the difference in GDP and AE_plannedfor all values of GDP. For further review see section “Inventories and Unplanned Investment Spending.”

Complete the table by calculating planned aggregate spending (AEPlanned) and unplanned inventory investment (IUnplanned).

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Using the table below what is the aggregate consumption function?

GDP	YD	C	*I_Planned*	*AE_Planned*	*I_Unplanned*
(billions of dollars)
$0	$0	$100	$300	$400	-$400
400	400	400	300	700	-300
800	800	700	300	1000	-200
1,200	1,200	1,000	300	1300	-100
1,600	1,600	1,300	300	1600	0
2,000	2,000	1,600	300	1900	100
2,400	2,400	1,900	300	2200	200
2,800	2,800	2,200	300	2500	300
3,200	3,200	2,500	300	2800	400

Table

The consumption function can be written as: C = $ billion + YD

We can find the aggregate consumption function by calculating aggregate autonomous consumer spending and the marginal propensity to consume. Aggregate autonomous consumer spending equals aggregate consumer spending when disposable income is zero; in this case, aggregate autonomous consumer spending is $100 billion. The marginal propensity to consume is the change in aggregate consumer spending divided by the change in disposable income; in this case, it is 0.75 [= ($400 − $100)/($400 − $0)]. For further review see section, “Consumer Spending.”

The consumption function can be written as: C = ______ billion + ______YD

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Using the table below, what is Y^*, income-expenditure equilibrium GDP?

GDP	YD	C	*I_Planned*	*AE_Planned*	*I_Unplanned*
(billions of dollars)
$0	$0	$100	$300	$400	-$400
400	400	400	300	700	-300
800	800	700	300	1000	-200
1,200	1,200	1,000	300	1300	-100
1,600	1,600	1,300	300	1600	0
2,000	2,000	1,600	300	1900	100
2,400	2,400	1,900	300	2200	200
2,800	2,800	2,200	300	2500	300
3,200	3,200	2,500	300	2800	400

Table

The income-expenditure equilibrium GDP is $2,000 billion.

The income-expenditure equilibrium GDP is $1,200 billion.

The income-expenditure equilibrium GDP is $1,000 billion.

The income-expenditure equilibrium GDP is $1,600 billion.

Correct! For further review see section, “The Income-Expenditure Multiplier.”

Incorrect. Y* is the level of GDP at which planned aggregate spending equals GDP. From the accompanying table, Y* is $1,600 billion. For further review see section, “The Income-Expenditure Multiplier.”

Using the table below, what is Y*, income-expenditure equilibrium GDP?

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Recall the consumption function is C = $100 billion + 0.75 x YD and the original equilibrium value of Y* is $1,600 billion. Use the table below to answer each of the following

GDP	YD	C	*I_Planned*	*AE_Planned*	*I_Unplanned*
(billions of dollars)
$0	$0	$100	$300	$400	-$400
400	400	400	300	700	-300
800	800	700	300	1000	-200
1,200	1,200	1,000	300	1300	-100
1,600	1,600	1,300	300	1600	0
2,000	2,000	1,600	300	1900	100
2,400	2,400	1,900	300	2200	200
2,800	2,800	2,200	300	2500	300
3,200	3,200	2,500	300	2800	400

Table

What is the value of the multiplier?

The multiplier is .

Recall the multiplier equals 1/(1 − MPC); the value of the multiplier is 4 = 1/(1 − 0.75). For further review see section, “The Income-Expenditure Multiplier.”

What is the value of the multiplier?

If planned investment spending falls to $200 billion, what will be the new Y*?

The new equilibrium level of GDP is $ billion.

Correct! For further review see section, "The Income-Expenditure Multiplier."

Sorry, planned investment spending will decrease by $100 billion to $200 billion, the new Y* will equal $1,200 billion. If planned investment spending equals $200 billion, it has fallen by $100 billion. Since the multiplier is 4, Y* will change by four times the change in planned investment spending, or decrease by $400 billion. For further review see section, “The Income-Expenditure Multiplier.”

If planned investment spending falls to $200 billion, what will be the new Y*?

If autonomous consumer spending rises to $200 billion, what will be the new Y*?

The new equilibrium level of GDP is $ billion.

If autonomous consumer spending rises to $200 billion from $100 billion, the new Y* will equal $2,000 billion. If autonomous consumer spending equals $200 billion, it has risen by $100 billion. Since the multiplier is 4, Y* will change by four times the change in autonomous consumer spending, or increase by $400 billion.For further review see section, “The Income-Expenditure Multiplier.”

If autonomous consumer spending rises to $200 billion, what will be the new Y*?

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Work It OutChapter 11(26)

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