Question 1

Explain the path to equilibrium when output is greater than planned spending.

Accepted Answer

When output is greater than planned spending, there is unplanned inventory investment. Firms planned to sell more of their goods than they sold, and the difference shows as an unplanned increase in inventories. Equilibrium will be restored when output is reduced to the point where it is just in line with planned spending.

Question 2

Assume an economy in which saving is -$100 at an output level of zero and the slope of the saving schedule is 1/10. If the economy is in equilibrium at 1200 calculate the level of saving and investment

Accepted Answer

Substituting Y = 1200 into S = -100 + .1 Y gives us 20. Since S = I then investment is 20.

Question 3

Define an exogenous variable.

Accepted Answer

A variable that is assumed not to depend on the state of the economy-that is, it does not change when the economy changes.

Question 4

-Assume the above consumption function for a hypothetical economy. Write out the algebraic equation for this function.

Accepted Answer

The answer of 
-Assume the above consumption function for a...

Question 5

Fill in the table below assuming the consumption function has the following form: C = 500 + .9Y.

Accepted Answer

The answer of Fill in the table below assuming the...

Question 6

Suppose the slope of the consumption function is .75 and there was an increase in income of $100. Calculate the increase in consumption.

Accepted Answer

The answer of Suppose the slope of the consumption function...

Question 7

-Explain the meaning of the consumption function depicted above. Why is this consumption function unrealistic?

Accepted Answer

The answer of 
-Explain the meaning of the consumption function...

Question 8

Assume that one day everyone decides to spend $100 more than they typically would. Explain why this would not necessarily result in an increase in income or output.

Accepted Answer

The answer of Assume that one day everyone decides to...

Question 9

Write out the equation for the consumption function in algebraic form and identify each component.

Accepted Answer

The answer of Write out the equation for the consumption...

Question 10

Figure 23.1
-Using Figure 23.1 derive the equation for this consumption function.

Accepted Answer

The answer of  Figure 23.1
-Using Figure 23.1 derive the...

Question 11

Planned aggregate expenditure (AE) equals consumption plus planned investment: AE = C + I. Discuss the conditions under which equilibrium in the goods market is achieved.

Accepted Answer

The answer of Planned aggregate expenditure (AE) equals consumption plus...

Question 12

Assume the level of saving that would take place in an economy is - $200 even when aggregate output is zero. Also assume that the marginal propensity to save is .1. Derive the algebraic expression for the saving function and the consumption function.

Accepted Answer

The answer of Assume the level of saving that would...

Question 13

Define the multiplier.

Accepted Answer

The answer of Define the multiplier....

Question 14

Assume a consumption function of the form C = 200 + .8Y. Derive the saving function and write out the algebraic representation.

Accepted Answer

The answer of Assume a consumption function of the form...

Question 15

Explain how the following two equations can both be true:
multiplier = 1/MPS multiplier = 1/(1 - MPC)

Accepted Answer

The answer of Explain how the following two equations can...

Question 16

Assume consumption is represented by the following: C = 200 + .9Y. Also assume that planned investment (I) equals 300.
(a) Now, suppose the level of income is equal to 4000. What is the level of planned aggregate expenditures at this level of income?What is the value of any unplanned changes in inventories?
(b) Given the information, calculate the equilibrium level of income.
(c) Given the information, calculate the level of consumption and saving that occurs at the equilibrium level of income.
(d) Suppose planned investment falls by 100. Graphically illustrate using the AE - Y graph the effects of this reduction in planned investment on the economy. Also, calculate the new level of equilibrium income.
(a) AE = 200 + .9(4000) + 300 = 4100. Unplanned changes in inventories equal
(b) Y = 5000
(c) C = 4700 and S = 300
(d) Y = 4000

Accepted Answer

The answer of Assume consumption is represented by the following:...

Question 17

Suppose that an economy is operating at equilibrium and for some reason households begin to save a smaller fraction of their income (the marginal propensity to save falls). How will this affect equilibrium output in the future when planned investment rises and falls?

Accepted Answer

The answer of Suppose that an economy is operating at...

Question 18

Assume planned investment is $50 billion and the economy is currently operating at $7 trillion. Calculate the level of aggregate expenditures and unintended inventories if the consumption level is $6.9 Trillion.

Accepted Answer

The answer of Assume planned investment is $50 billion and...

Question 19

Assume a hypothetical economy where all income is consumed. Theoretically what is the value of the income multiplier in this case?

Accepted Answer

The answer of Assume a hypothetical economy where all income...

Question 20

Prove through the use of algebra that in a two sector economy saving must be equal to planned investment at the equilibrium level of output. (Hint: Remember that C + S = Y)

Accepted Answer

The answer of Prove through the use of algebra that...

Exam 8: Aggregate Expenditure and Equilibrium Output