Work It Out Chapter 11A (26A)

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Work It Out

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In an economy without government purchases, transfers, or taxes, and without imports or exports, aggregate autonomous consumer spending is $500 billion, planned investment spending is $250 billion, and the marginal propensity to consume is 0.5.

Write the expression for planned aggregate spending as in Equation 11(26)A-1: AE_planned= A + MPC ×YD + I_planned.

AE_planned = $ billion + YD + $ billion

Correct!

Incorrect. In an economy without government purchases, planned aggregate spending equals the aggregate consumption function plus planned investment spending:

Write the expression for planned aggregate spending as in Equation 11(26)A-1: AEplanned = A + MPC ×YD + Iplanned.

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Find the equilibrium value of Y* algebraically.

Y* = $ billion

Correct!

Incorrect. In an economy without taxes or government transfers, GDP equals disposable income. The economy will be in income–expenditure equilibrium when GDP equals planned aggregate spending.

Find the equilibrium value of Y* algebraically.

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Recall the planned aggregate spending can be written as AE_planned= $500 billion + 0.5YD + $250 billion.

What is the value of the multiplier?

The multiplier is .

Correct! For further review see section, "Deriving the Multipler Algebraically."

Incorrect. The value of the multiplier is 2 [1/1(1 − MPC) = 1/(1 − 0.5) = 2]. See equation 11A-6(26A-6). For further review see section, “Deriving the Multiplier Algebraically.”

What is the value of the multiplier?

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Recall the planned aggregate spending can be written as AE_planned = $500 billion + 0.5YD +$250 billion.

How will Y* change if autonomous consumer spending falls to $450 billion?

Equilibrium level of GDP will be $ billion.

Correct!

Incorrect. If autonomous consumer spending falls to $450 billion, it will have decreased by $50 billion. Given a multiplier of 2, Y* will fall by $100 billion when autonomous consumer spending falls by $50 billion. The new Y* equals $1.400 billion.

How will Y* change if autonomous consumer spending falls to $450 billion?

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Work It OutChapter 11A (26A)

Question 1 of 4

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