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SS3.F09 - Principles of Economics W1105x-1 Fall 2009 Sunil...

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Principles of Economics W1105x-1 Fall 2009 Sunil Gulati Solution Set #3 1. a. Ace Computers’ sales contribute to consumption ( C , sales to households), planned investment ( I , sales to private firms), government purchases ( G ), and net exports ( NX ). In addition, unplanned investment ( I ) occurs when there are changes in inventories. Scenario I Scenario II Scenario III C $200 million $250 million $300 million I $ 50 million $ 50 million $ 50 million G $100 million $100 million $100 million NX $100 million $100 million $100 million Total expenditures $450 million $500 million $550 million Change in inventories +$50 million $0 million –$50 million Contribution to GDP $500 million $500 million $500 million Total expenditures on Ace’s computers are $450 million, $500 million and $550 million in Scenarios I, II and III, respectively. The contribution of Ace Computers to GDP in 2006 is equal to $500 million in each scenario. b. In Scenario I, Ace will likely decrease its rate of output in 2007 because sales were only $450 million. The firm may want to sell the $50 million of computers produced, but not sold, in 2006 before producing more computers in 2007. In Scenario II,
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