Chapter 11, Problem 12P

To determine

Concept Introduction:

Gross Domestic Product: It is defined as the money value of all finished goods and services that are produced by the normal resident and nonresident of the country inside the boundary of a country usually for one year.

The formula to calculate change in GDP is,

Here,

• is autonomous spending.
• MPC is marginal propensity to consume.

Marginal Propensity to Consume ( MPC ): It is defined as the change which occurs in total consumption level due to change in income.

The formula to calculate MPC is

Here,

• is change in income.
• is change in consumption level.
• MPC is marginal propensity to consume.

Multiplier: It is defined as the ratio of total change in gross domestic product due to change in the autonomous spending.

The formula to calculate multiplier is,

Here,

• MPC is marginal propensity to consume.

Aggregate Consumption Level ( C ): It is defined as the consumption of whole economy

The formula to calculate change in aggregate spending is,

Here,

• is change in consumption.
• is change in income.
• MPC is marginal propensity to consume.

Consumption Function: It shows how the change in disposable income of an individual changes the consumption level.

The formula to calculate consumption function is,

Here,

• C is consumption level.
• is autonomous consumption.
• is disposable income
• MPC is marginal propensity to consume.

Planned Aggregate Spending: It is the summation of consumption level in an economy and the planned investment.

The formula to calculate planned aggregate spending is,

Here,

• C is consumption level.
• is the planned investment spending.
• AE is the planned aggregate spending.