(Transcript of audio with descriptions. Transcript includes narrator headings and description headings of the visual content)
(Speaker)
This question will review the mathematical relationship between GDP, disposable income, consumption spending, planned investment spending, planned aggregate spending, and unplanned investment spending.
(Description)
The accompanying table shows gross domestic product, GDP, disposable income, YD, consumer spending, C, and planned investment spending, I sub Planned, in an economy. Assume there is no government or foreign sector in this economy. Complete the table by calculating planned aggregate spending, AE sub Planned, and unplanned inventory investment, I sub Unplanned. Table has 6 columns labeled GDP, YD, C, I sub Planned, AE sub Planned, I sub Unplanned. There are 9 rows of data in the table. First four columns have the following entries: GDP - 0, 400, 800, 1200, 1600, 2000, 2400, 2800, and 3200. YD - 0, 400, 800, 1200, 1600, 2000, 2400, 2800, and 3200. C - 100, 400, 700, 1000, 1300, 1600, 1900, 2200, and 2500. I sub planned - all equal to 300. AE sub Planned and I sub Unplanned are empty columns. All numbers are given in billions of dollars.
(Speaker)
In the table, you are presented with the values of GDP, disposable income, consumption, and planned investment spending. For the first part of the question you are asked to calculate planned aggregate spending. Here you can see that planned aggregate spending is equal to consumption plus planned investment. Both numbers are given to you in the table. When GDP is zero dollars, consumption is 100 dollars, and planned investment is 300 dollars. Adding these together yields planned aggregate spending of 400 dollars.
(Description)
Recall that planned aggregate expenditure is the sum of consumption and planned investment. First row value for AE sub Planned is inserted in the table as 400 dollars (100 dollars plus 300 dollars).
(Speaker)
When GDP increases to 400 dollars, consumption increases to 400 dollars and planned investment remains 300 dollars. You will notice the planned investment is constant for all values of GDP. Adding consumption with planned investment yields planned aggregate spending of 700 dollars.
(Description)
Second row value for AE sub Planned is inserted in the table as 700 dollars (400 dollars plus 300 dollars).
(Speaker)
It is worth pointing out that every time GDP increases by 400 dollars, consumption will increase by 300 dollars. We will use this information later on when solving for the marginal propensity to consume. You will continue this process for the remaining values of GDP. Again, you will notice that as GDP increases by 400 dollars, both consumption and planned aggregate spending increase by 300 dollars.
(Description)
Values of 1000, 1300, 1600, 1900, 2200, 2500, 2800 are inserted in column AE sub Planned in rows 3-9 of the table.
(Speaker)
Now that you have solved for planned aggregate spending, the problem asks you to calculate unplanned inventory investment. Here you were given the equation for unplanned investment as the difference between GDP and planned aggregate spending. When planned aggregate spending exceeds GDP, then firms will experience a decrease in their business inventories. This decrease causes unplanned investment spending to decrease. However, if GDP is greater than planned aggregate spending, then firms will experience an increase in unplanned inventory investments. When GDP equals zero dollars, unplanned inventory investment is minus 400 dollars. In other words households and firms plan to purchase 400 dollars in goods while zero dollars of goods are produced.
(Description)
Recall that unplanned investment is the difference between GDP and planned aggregate expenditures. First row value for I sub Unplanned is inserted in the table as negative 400 dollars (0 dollars minus 400 dollars).
(Speaker)
This will cause inventory investment to unexpectedly decline by 400 dollars. When GDP equals 400 dollars, households and firms plan to spend 700 dollars, which will cause an unexpected decline of 300 dollars of inventory investment.
(Description)
Second row value for I sub Unplanned is inserted in the table as negative 300 dollars (400 dollars minus 700 dollars).
(Speaker)
You will continue taking the difference between GDP and planned aggregate spending for the remaining rows. You will notice that unplanned inventory investment equals zero dollars when GDP and plan aggregate spending equal 1600 dollars.
(Description)
Values of negative 200, negative 100, 0, 100, 200, 300, 400 are inserted in column I sub Unplanned in rows 3-9 of the table.