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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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