Question

ASSIGNMENT # 3

Actual aggregate expenditure or output (Y) (billions of $)	Consumption (C) (billions of $)	Planned investment (billions of $)	Government spending (G) (billions of $)	Net exports (NX) (billions of $)	Unplanned investment (inventory change) (billions of $)
500	300	150	100	50
600	350
700	400
800	450
900	500

1. For the table shown, answer the following questions:

1. For each level of actual aggregate expenditure, calculate unplanned inventory investment.
2. What is the equilibrium level of aggregate expenditure in this economy? How do you know?
3. Suppose that planned investment increases by $50 billion. What is the new equilibrium level of aggregate expenditure in this economy?
4. What is the marginal propensity to consume in this economy?
5. What is the expenditure multiplier in this economy?

Answer 1

1. a. I(unplanned)=Y-C-Ip-G-NX

Y	C	Ip	G	NX	I(unplan)
500	300	150	100	50	-100
600	350	150	100	50	-50
700	400	150	100	50	0
800	450	150	100	50	50
900	500	150	100	50	100

b.) Equilibrium level is at 700, where Unplanned I is 0, i.e., no over/under investment

c.) New level= 800

Y	C	Ip	G	NX	Iup
500	300	200	100	50	-150
600	350	200	100	50	-100
700	400	200	100	50	-50
800	450	200	100	50	0
900	500	200	100	50	50

d.) MPC= change in C/ Change in Y= 0.5

e.) Expenditure multuplier= 1/1-c= 2