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Economics

David Begg, Gianluigi Vernasca, Stanley Fische

Chapter 16

Output and aggregate demand - all with Video Answers

Educators

Chapter Questions

05:16

Problem 1

(a) Find equilibrium income when investment demand is 400 and $C=0.8 \mathrm{Y}$. (b) Would output be higher or lower if the consumption function were $C=100+$ $0.7 \mathrm{Y} ?$

Jennifer Stoner
Jennifer Stoner
Numerade Educator
01:20

Problem 2

Which of the following statements is correct? (a) Any tax is a tax on jobs because it reduces aggregate demand. (b) Provided the government spends the tax revenue, the impact of higher spending outweighs the adverse demand effect of higher taxes. (c) Autonomous consumption demand is directly related to iconsumer confidence. (d) All the above statements could be true, depending on the other things assumed equal.

Chandra Jain
Chandra Jain
Numerade Educator
04:13

Problem 3

Suppose firms are initially surprised by changes in demand. (a) When demand, falls, what is the initial effect on stocks of unsold goods held by firms? (b) What do firms plan to do to stocks as soon as they have time to adjust production? Does this reduce or increase the initial fall in demand? (c) Once stocks have been adjusted, what then happens to production and output?

Haricharan Gupta
Haricharan Gupta
Numerade Educator
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Problem 4

Could the multiplier ever be less than 1 ?

Rashmi Sinha
Rashmi Sinha
Numerade Educator
01:37

Problem 5

Common fallacies Why are these statements wrong? (a) If people were prepared to save more, investment would increase and we could get the economy moving again. (b) Lower output leads to lower spending and yet lower output. The economy could spiral downwards forever.

Vaibhav Jain
Vaibhav Jain
Numerade Educator
02:02

Problem 6

Assume that an economy is in equilibrium. Planned investment is $£ 100$. The $M P C$ is $0.6$. Suppose investment rises by $£ 30$. (a) What happens to the equilibrium output?
Now suppose people decide to save a higher proportion of their income: the consumption function changes from $C=0.8 \mathrm{Y}$ to $C=0.5 \mathrm{Y}$. (b) What happens to equilibrium income (planned investment being $£ 100$ )? (c) What happens to the equilibrium proportion of income saved? Explain.

Jennifer Stoner
Jennifer Stoner
Numerade Educator
01:51

Problem 7

Assume that the economy is in equilibrium. The $M P C$ is $0.6$. Suppose investment demand rises by $£ 30$. (a) By how much does the equilibrium output increase? (b) How much of that increase is extra consumption demand? Draw the corresponding diagram using planned investment and planned saving assuming that the initial output is 100 .

Nick Johnson
Nick Johnson
Numerade Educator
01:51

Problem 8

Suppose the consumption function is $C=0.75 \mathrm{Y}$ and planned investment is 40 . (a) Draw a diagram showing the aggregate demand schedule. (b) If actual output is 100 , what unplanned actions will occur? (c) What is the equilibrium output? (d) Do you get the same answer using planned saving equals planned investment?

Nick Johnson
Nick Johnson
Numerade Educator
01:42

Problem 9

The diagram below shows the aggregate demand and output of an economy. Along the 45 -degree line $Y$, demand equals output. Is there an inflationary gap or a deflationary gap if the answer is $250 ?$

Haricharan Gupta
Haricharan Gupta
Numerade Educator
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Problem 10

Suppose confidence depends a little on the current level of output, and the model therefore becomes $I=a Y+I^{*} C=[\mathrm{A}]+c Y=\left[A^{*}+B Y\right]+c Y$ where $\mathrm{I}^{*}$ and $\mathrm{A}^{*}$ remain autonomous and independent of output, but $a$ and $b$ reflect the dependence of confidence on the current level of output. (a) What is the new value of the multiplier? (b) Is this higher or lower than before? (c) Is equilibrium output higher or lower than before?

Victor Salazar
Victor Salazar
Numerade Educator
02:36

Problem 11

When could the paradox of thrift fail to be true?

Manasvee Singh
Manasvee Singh
Numerade Educator
02:11

Problem 12

Essay question 'The remarkably strong relationship between consumption and income confirms that most people want to spend most of their income as soon as they can. We are all material girls and boys at heart.' Is the inference justified?

Haricharan Gupta
Haricharan Gupta
Numerade Educator
01:51

Problem 13

Planned investment is 100 . Initially, the consumption function is $C=100+0.8 \mathrm{Y}$. There are three ways in which greater pessimism about the future might affect behaviour: (a) planned investment falls from 100 to 50, (b) autonomous consumption falls from 100 to 50 , (c) the marginal propensity to consume falls from $0.8$ to $0.7$ as people save more of each unit of additional income. Draw a graph of each change and its effect on short-run equilibrium output.

Nick Johnson
Nick Johnson
Numerade Educator
03:36

Problem 14

Suppose your economy is going through a recession. Individuals desire to save more and spend less. How does the paradox of thrift explain the consequences of increased savings in your economy?

Haricharan Gupta
Haricharan Gupta
Numerade Educator