So the aggregate consumption function is c 3500 07 yd

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Chapter 20 / Exercise 3
Exploring Economics
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So the aggregate consumption function is C = 3,500 + 0.7 × YD . 347.a. A lower interest rate will increase planned investment and aggregate spending. This will increase planned aggregate spending above real GDP, and inventories will fall. Thus unplanned inventory investment will be negative. b. Pessimism about the growth rate of the economy will decrease planned investment. This will decrease planned aggregate spending so that it is less than real GDP, and inventories will accumulate. Thus unplanned inventory investment will be positive. 348.a. Given this information, AE Planned = 400 + 0.75 × YD . In equilibrium, AE Planned = GDP = YD . So we can rewrite YD = 400 + 0.75 × YD , or 0.25 × YD = 400, and equilibrium YD = GDP = $1,600. b. If GDP = $2,000, AE Planned = 400 + 0.75 × (2,000) = $1,900, so output exceeds spending and unplanned inventory investment is $100. 349.a. Given this information, AE Planned = 750 + 0.80 × YD . In equilibrium, AE Planned = GDP = YD . So we can rewrite YD = 750 + 0.80 × YD , or 0.20 × YD = 750, and equilibrium YD = GDP = $3,750. b. With the MPC = 0.80, the multiplier M = 5. So an increase of $100 of new planned investment will increase real GDP by $500. So the new equilibrium real GDP is $4,250. 350.The MPC = (change in consumer spending) / (change in disposable income) = $40 / $50 = 0.80. The multiplier = 1 / (1 – MPC ) = 1 / 0.2 = 5. 351.The general equation of the consumption function is C = A + MPC × ( YD ). The letter A stands for autonomous consumption, the level of consumption that occurs when disposable income YD is zero. A = $10. The marginal propensity to consume is the slope of the line, MPC = $40 / $50 = 0.80. So C = 10 + 0.80 × ( YD ). If YD = $500, C = $410. 352.a. As YD increases by $1,000, C increases by $800, so the MPC = 800 / 1,000 = 0.80. b. If you add a column for AE Planned = C + I Planned , you will see that real GDP = AE Planned at $3,500. 353.D 354.A 355.C 356.C 357.A 358.B 359.A 360.A Page 81
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Chapter 20 / Exercise 3
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361.A 362.A 363.A 364.A 365.A 366.B 367.A 368.B 369.B 370.B 371.A 372.A 373.C 374.B 375.B 376.C 377.D 378.B 379.B 380.B 381.A 382.A Page 82

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