A country’s GDP is defined by the following equation: GDP = Consumer Spending + Investment spending. The economy of this country is closed and there’s no government. Investment spending is defined by the following equation: Investment Spending = Investment (planned) + Investment (unplanned). Investment (planned) is fixed at 350. Consumer spending is defined by the following equation: Consumer spending = 200 + 0.55 (GDP). And for this country, Planned Expenditure = Consumer Spending + Investment Planned. Based on this information, attempt the following questions: a. “Investment (unplanned) will be negative if GDP is 900” – showing work, test the authenticity of this statement. b. How do you think GDP (and production) will change if the income of this country is 1500? Explain by deriving Investment (unplanned) for an income of 1500. c. Derive the GDP for which Planned Expenditure = GDP.
A country’s
spending. The economy of this country is closed and there’s no government. Investment spending
is defined by the following equation: Investment Spending = Investment (planned) + Investment
(unplanned). Investment (planned) is fixed at 350. Consumer spending is defined by the
following equation: Consumer spending = 200 + 0.55 (GDP). And for this country, Planned
Expenditure = Consumer Spending + Investment Planned. Based on this information, attempt the
following questions:
a. “Investment (unplanned) will be negative if GDP is 900” – showing work, test the
authenticity of this statement.
b. How do you think GDP (and production) will change if the income of this country is 1500?
Explain by deriving Investment (unplanned) for an income of 1500.
c. Derive the GDP for which Planned Expenditure = GDP.
d. Supposed Investment (planned) was increased to 450. How will income-expenditure
equilibrium change.
e. Relate your finding of 5(d) to multiplier effect. Why do you think this happens?
f. Draw points of 5(a, b, c) in a single diagram.
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