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Unformatted text preview: The Aggregate Expenditures Model ANSWERS TO END-OF-CHAPTER QUESTIONS 9-1 What is an investment schedule and how does it differ from an investment demand curve? A n i n v e s t m e n t s c h e d u l e s h o w s t h e l e v e l o f i nvestment spending for a given level of GDP. A n i n v e s t m e n t d e m a n d c u r v e s h o w s h o w e x p e c t e d r a t e s o f p r o f i t a n d r e a l i n t e r e s t r a t e s d e t e r m i n e t h e l e v e l o f i n v e s t m e n t s p e n d i n g . I n the simple AE model, investment spending is a s s u m e d t o b e i n d e p e n d e n t o f t h e l e v e l o f r e a l G D P . 9-2 ( Key Question ) Assuming the level of investment is $16 billion and independent of the level of total output, complete the following table and determine the equilibrium levels of output and employment in this private closed economy. What are the sizes of the MPC and MPS? Possible levels of employment (millions) Real domestic output (GDP=DI) (billions) Consumption (billions) Saving (billions) 40 45 50 55 60 65 70 75 80 $240 260 280 300 320 340 360 380 400 $244 260 276 292 308 324 340 356 372 $ _____ $ _____ $ _____ $ _____ $ _____ $ _____ $ _____ $ _____ $ _____ S a v i n g d a t a f o r c o m p l e t i n g t h e t a b l e ( t o p t o b o t t o m ) : $- 4 ; $ ; $ 4 ; $ 8 ; $ 1 2 ; $ 1 6 ; $ 2 ; $ 2 4 ; $ 2 8 . E q u i l i b r i u m G D P = $ 3 4 b i l l i o n , d e t e r m i n e d w h e r e (1) aggregate expenditures equal GDP (C of $324 billion + I of $16 billion = GDP of $340 billion); or (2) where planned I = S ( I of $16 billion = S of $16 billion). Equilibrium level of employment = 65 million; MPC = .8; MPS = .2. 9-3 Using the consumption and saving data in question 2 and assuming investment is $16 billion, what are saving and planned investment at the $380 billion level of domestic output? What are saving and actual investment at that level? What are saving and planned investment at the $300 billion level of domestic output? What are the levels of saving and actual investment? Use the concept of unplanned investment to explain adjustments toward equilibrium from both the $380 and $300 billion levels of domestic output. A t t h e $ 3 8 b i l l i o n l e v e l o f G D P , s a v i n g = $ 2 4 b i l l i o n ; p l a n n e d i n v e s t m e n t = $ 1 6 b i l l i o n ( f r o m the question). This deficiency of $8 billion of planned investment causes an unplanned $8 billion increase in inventories. Actual investment is $24 billion (= $16 billion of planned investment plus $8 billion of unplanned inventory investment), matching the $24 billion of actual saving. A t t h e $ 3 b i l l i o n l e v e l o f G D P , s a v i n g = $ 8 b illion; planned investment = $16 billion (from the question). This excess of $8 billion of planned investment causes an unplanned $8 billion decline in inventories. Actual investment is $8 billion (= $16 billion of planned investment minus $8 billion of unplanned inventory disinvestment) matching the actual of $8 billion. billion of unplanned inventory disinvestment) matching the actual of $8 billion....
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- Summer '11