Chapter 1. Chapter 11(26)

Step 1

Work It Out

Chapter 11(26)

true

Question

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	$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

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).

3:23

Step 2

Question

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 = $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

Step 3

Question

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

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

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	*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 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