A. The accompanying table shows gross domestic product...

a. The accompanying table shows gross domestic product (GDP), disposable income (YD), consumer spending $(C),$ and planned investment spending $\left(I_{\text {Planned }}\right)$ in an economy. Assume there is no government or foreign sector in this economy. Complete the table by calculating planned aggregate spending $\left(A E_{\text {Plamed }}\right)$ and unplanned inventory investment $\left(I_{ \text {Unplamed} )}\right.$ b. What is the aggregate consumption function? c. What is $Y^{*},$ income-expenditure equilibrium GDP? d. What is the value of the multiplier? e. If planned investment spending falls to $\$ 200$ billion, what will be the new $Y^{*} ?$ f. If autonomous consumer spending rises to $\$ 200$ billion, what will be the new $Y^{*}$ ?

a. The accompanying table shows gross domestic product (GDP), disposable income (YD), consumer spending $(C),$ and planned investment spending $\left(I_{\text {Planned }}\right)$ in an economy. Assume there is no government or foreign sector in this economy. Complete the table by calculating planned aggregate spending $\left(A E_{\text {Plamed }}\right)$ and unplanned inventory investment $\left(I_{ \text {Unplamed} )}\right.$
b. What is the aggregate consumption function?
c. What is $Y^{*},$ income-expenditure equilibrium GDP?
d. What is the value of the multiplier?
e. If planned investment spending falls to $\$ 200$ billion, what will be the new $Y^{*} ?$
f. If autonomous consumer spending rises to $\$ 200$ billion, what will be the new $Y^{*}$ ?

Key Concepts

Autonomous Spending

Autonomous spending refers to the components of aggregate expenditure that do not change with the level of income, such as autonomous consumption or fixed investment. These elements are considered exogenous to the model and form the basis for determining the initial change in total income, which is then multiplied through the multiplier effect.

Income-Expenditure Equilibrium

Income-expenditure equilibrium occurs when planned aggregate spending is exactly equal to the total production (GDP) of an economy. At this point, there is no unintended accumulation or depletion of inventories, and firms have no incentive to change their production levels, marking a state of short-run equilibrium.

Unplanned Inventory Investment

Unplanned inventory investment is the discrepancy between the amount of goods produced and the amount that was actually sold when planned spending does not match output. In the income?expenditure model, unplanned changes in inventories are used as a signal for firms to adjust production levels, thereby moving the economy toward equilibrium.

Economic Multiplier

The economic multiplier measures the extent to which a change in autonomous spending, such as investment or autonomous consumption, leads to a larger overall change in equilibrium GDP. It is calculated as the reciprocal of the marginal propensity to save, highlighting the amplified effects of initial spending changes on national income.

Consumption Function

The consumption function represents the relationship between disposable income and consumer spending. Typically expressed as a linear function, it includes an autonomous consumption component (spending that occurs even when income is zero) and a marginal propensity to consume, which indicates the change in consumption resulting from a change in disposable income.

Aggregate Expenditure (AE)

Aggregate expenditure is the total amount of planned spending in an economy, which typically includes consumption and investment spending. It is central to the income?expenditure model in macroeconomics, where the equilibrium level of GDP is determined by the point at which aggregate expenditure (demand) equals the total output (income) produced in the economy.

Investment Spending (Planned Investment)

Planned investment spending refers to the expenditure by firms on capital goods, inventory, and other investments that are determined before production begins. In the context of the income?expenditure model, investment is considered an exogenous variable that, along with autonomous consumption, drives the equilibrium level of GDP.

Transcript

00:02 So we start out knowing what our output, our gdp, and our disposable income are, and the level of consumption at each of those gdps, which is also disposable income, since we don't have taxes in our model quite yet.

00:21 And we've got a planned investment of $300, about $300 billion.

00:27 And so we're supposed to figure out aggregate plans.

00:32 Spending and our unplanned investment.

00:35 So what we do is go through our table and i've copied part of it on the whiteboard here and we'll add our aggregate expenditures are consumption plus investment which is planned investment which is 300.

00:51 So we go through our different possible income and output levels and add that 300 in planned investment to our amount of consumption.

01:04 So that gives us if we don't have any output, our consumption's still 100, planned investments 300, so that would make our aggregate expenditures equal to 400.

01:16 And so if the output is zero, but people spend $400, that had to come out of inventory investment, so that inventory investment decreases by 400 to meet that aggregate expenditure of 400.

01:32 From the next level of disposable income and gdp, consumption's 400, and our aggregate expenditures, when we add in the planned investment, would be 700.

01:44 So if our output's 400 and we spend 700, inventories decreased by 300.

01:51 We keep doing the same thing for different levels of output, and that completes our table.

01:59 If we want, we want to, we want to, we want to know our aggregate consumption function, then our aggregate consumption function is defined as our autonomous consumption, which is what is consumed if there's no income or output, plus the marginal propensity to consume times disposable income.

02:20 So we know when income is zero, consumption's 100 according to our table.

02:26 So that's our intercept.

02:27 Our marginal propensity to consume is our change in consumption for a given change in income...

Please give Ace some feedback