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Question 1 of 4

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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 (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 $ $
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
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).
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      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 = $ 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 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

          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 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 .

              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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