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First, use the data given in question 1, and assume the level of autonomous investment is $50 billion. If the full-employment level of output is $525 billion, what is the equilibrium level of output and employment? Does a recessionary gap or an inflationary gap exist? Second, assume the level of autonomous investment is $150 billion. What is the equilibrium level of output and employment? Does a recessionary gap or an inflationary gap exist? Explain the consequences of an inflationary gap using the aggregate expenditures model.

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Economics For Today

10th Edition
Tucker
Publisher: Cengage Learning
ISBN: 9781337613040

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BuyFindarrow_forward

Economics For Today

10th Edition
Tucker
Publisher: Cengage Learning
ISBN: 9781337613040
Chapter 19, Problem 8SQP
Textbook Problem
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First, use the data given in question 1, and assume the level of autonomous investment is $50 billion. If the full-employment level of output is $525 billion, what is the equilibrium level of output and employment? Does a recessionary gap or an inflationary gap exist? Second, assume the level of autonomous investment is $150 billion. What is the equilibrium level of output and employment? Does a recessionary gap or an inflationary gap exist? Explain the consequences of an inflationary gap using the aggregate expenditures model.

To determine

Inflationary and recessionary gaps in the economy.

Explanation of Solution

The unplanned inventory investment can be calculated by subtracting the consumption from the real GDP and subtracting the autonomous investment from this value. In the first case, where the level of employment is 40 millions, the consumption is $300, whereas the real GDP is $325. The autonomous investment is $50. Thus, the unplanned inventory can be calculated as follows:

Unplanned inventory=(Real GDPConsumption)Autonomous investment=(325300)50=2550=25

Thus, the unplanned inventory in this case is -25. Similarly, the other cases’ unplanned inventory can be calculated and the table can be completed as follows:

Possible levels of employment (millions of workers)Real GDP (Output) equals disposable income (billions of dollars)Consumption (billions of dollars)Unplanned inventory (billions of dollars) (Autonomous investment $50)Unplanned inventory (billions of dollars) (Autonomous investment &#

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