Chapter 1. Chapter 11(26)

Step 1

Work It Out
Work It Out
Chapter 11(26)
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Question

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

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

GDP YD C IPlanned AEPlanned IUnplanned
(billions of dollars)
$0 $0 $100 $300 $Asppw4T4YxFWaQJsk/Q+8zR5Yhg+zZr1z1PDL72nIDk= $i1cvozkreS3JL2cu8hz2rHg0P2NrQFeWCoWOOZV1BSU=
400 400 400 300 TT5U0laEd9tDaWNv2sP9Gj3FtVESpJsZbZQix2GRNsg= NyjVGwvsKumm4s5Om5Buq+7K4D3DWRyRzfpV1StDHR4=
800 800 700 300 RbVX87z1wM98eeB5DiITaNDG8W8PN68DQRHliDRdX3Y= 4zdEfW84UnjV1ketTId/TVeIuSz6QilEerXK7apt/Rw=
1,200 1,200 1,000 300 0ruk9FfaN+c7g1UOHgBFxcdP7W2Py3K4Peo/0kL6Dy8= wn3m2V4vjcbHXvO+q0TSeST5vxeCw6LYI/o1Zd28mOs=
1,600 1,600 1,300 300 0oiasBg5oc5P3PhM/7yXgKiNyN3js1ccWPWAP8gIjNo= 9B4CgS0P6myzujgGYZQ4Jk6S3YA7iMYhGH16OA==
2,000 2,000 1,600 300 jmX0YRMZRVHAhzKFx6Z2pNrJucX0jTfMscgKt/aP9F0= OocROWniS+8tKb62/xyxBJjR0EXxKvfrK1s63pSewY0=
2,400 2,400 1,900 300 oPLzmFlqd2xw/LdGp+DtkW3Wkg1Fm4lwT73hYz6YItQ= 7lQNJPDWGdqTBlnw1I1ARk2eY87mktUtq1I7c0kZJBk=
2,800 2,800 2,200 300 GpWBqLltqa9biJEQrLopp7GoY/RxgnZuf4Ielq0tH20= CEjbniDGSzPMF42QeWHbrh7NRJ+QJeimBwaO+JN+D7c=
3,200 3,200 2,500 300 0nJt9tHMzhGT4NcIvANr4IUC005ewgRHVXV17wEv81w= fTyGmp1yitH7LwH6LIKT96hWtZLIenKPfxbuho8+oMg=
Table
AEPlanned is the sum of consumption and Iplanned. So when C is $100 and Iplanned is $300 then AEPlanned is $400. The remaining values of AEPlanned are found by adding C and Iplanned for all levels of GDP. You can find IUnplanned as the difference between disposable income and AEplanned. When GDP is $0, IUnplanned is -$400 ($0 - $400). You can find the remaining values of IUnplanned by taking the difference in GDP and AEplanned for 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).
3:23
video_transcripts/Chapter26/Ch26-step1.html

Step 2

Question

Using the table below what is the aggregate consumption function?

GDP YD C IPlanned AEPlanned IUnplanned
(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 = $ycZxu+DXqnN76FbZTVrpfg== billion + vYXgcddeLXk=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
1:36
video_transcripts/Chapter26/Ch26-step2.html

Step 3

Question

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

GDP YD C IPlanned AEPlanned IUnplanned
(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
Iso2X3cOqhRs4QvteL4DD0XAW3OC+1FvI0kvhvi8SD8D5IimbksOYdjRy+QloFnTw7EW5QMdLHgFCbnf4I5OabgiCChmeJZDCUtgWexZfT2Dw9phUDg1pa7MTeIxMOXnhbPQGLmo9gGINIVjKtiTWyJMn6Y3SdUnsSA1cgbexofnHN+68AgxSB9MxeugjMmqGqhN/HWLXSmMijjBXwsGwcyb1uganmW8EkYxmEq9BCfr7ml8LmjkrWfJvmSyl/Ysp4Ivv4MHQnY4Q21T/EU0gHANMyMzv8k0SenelctsHPXhK7xakED5Bl37p77QsWUdNfB2clR4m+s=
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?
1:36
video_transcripts/Chapter26/Ch26-step3.html

Step 4

Question

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 IPlanned AEPlanned IUnplanned
(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 h4XZagboIgc=.

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?

Question

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

The new equilibrium level of GDP is $g6T8ZmmQlHokNDHTbOwhCQnEz8a3zQ4L 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*?

Question

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

The new equilibrium level of GDP is $b806i3Co3VK7jPhSSE2F1/FxeRF/kNu/ 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*?
0:28
video_transcripts/Chapter26/Ch26-step4.html