As you know equilibrium occurs where Y = AE. That is, where aggregate output equals planned aggregate expenditure. Remember that planned aggregate expenditure in an with a government is AE = C+I+G, so equilibrium is Y = C +I+G. If output economy (Y) exceeds planned aggregate expenditure (C+I+ G), there will be an unplanned increase in inventories. That means actual investment will exceed planned investment. Conversely, if C+I+G exceeds Y, there will be an unplanned decrease in inventories. Assume that MPS is 0.25 and autonomous consumption is 100 (autonomous consumption is defined as the expenditures that consumers must make even when they have no disposable income). Assume also that government spending (G) is 200 and the government is running a balanced budget. Assume also that planned investment (I) is 150. a) Write the consumption and saving functions (equations) b) Calculate the planned AE at any three levels of aggregate output (income) and unplanned inventory changes accordingly. At each level of aggregate output, comment on how the firms in this economy react to unplanned inventory changes. c) Find the equilibrium level of output. d) Show the equilibrium of output graphically. e) How does this increase in G without any change in T affect your answers in a, b, c and d above?
As you know equilibrium occurs where Y = AE. That is, where aggregate output equals planned aggregate expenditure. Remember that planned aggregate expenditure in an with a government is AE = C+I+G, so equilibrium is Y = C +I+G. If output economy (Y) exceeds planned aggregate expenditure (C+I+ G), there will be an unplanned increase in inventories. That means actual investment will exceed planned investment. Conversely, if C+I+G exceeds Y, there will be an unplanned decrease in inventories. Assume that MPS is 0.25 and autonomous consumption is 100 (autonomous consumption is defined as the expenditures that consumers must make even when they have no disposable income). Assume also that government spending (G) is 200 and the government is running a balanced budget. Assume also that planned investment (I) is 150. a) Write the consumption and saving functions (equations) b) Calculate the planned AE at any three levels of aggregate output (income) and unplanned inventory changes accordingly. At each level of aggregate output, comment on how the firms in this economy react to unplanned inventory changes. c) Find the equilibrium level of output. d) Show the equilibrium of output graphically. e) How does this increase in G without any change in T affect your answers in a, b, c and d above?
Chapter9: The Keynesian Model In Action
Section: Chapter Questions
Problem 18SQ
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Transcribed Image Text:As you know equilibrium occurs where Y = AE. That is, where aggregate output equals
planned aggregate expenditure. Remember that planned aggregate expenditure in an
economy with a government is AE = C +I+ G, so equilibrium is Y = C+I+ G. If output
(Y) exceeds planned aggregate expenditure (C +I+G), there will be an unplanned increase
in inventories. That means actual investment will exceed planned investment. Conversely,
if C+I+G exceeds Y, there will be an unplanned decrease in inventories.
Assume that MPS is 0.25 and autonomous consumption is 100 (autonomous consumption
is defined as the expenditures that consumers must make even when they have no
disposable income). Assume also that government spending (G) is 200 and the government
is running a balanced budget. Assume also that planned investment (I) is 150.
a) Write the consumption and saving functions (equations)
b) Calculate the planned AE at any three levels of aggregate output (income) and
unplanned inventory changes accordingly. At each level of aggregate output, comment
on how the firms in this economy react to unplanned inventory changes.
c) Find the equilibrium level of output.
d) Show the equilibrium of output graphically.
e) How does this increase in G without any change in T affect your
answers in a, b, c and d above?
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