Question

a. Complete the table below. All figures are dollar amounts. Assume planned investment -$25 and note that once planned investment is determined, it stays constant in our model) regardless of the level of GDP. Remember that U.L.I. = unplanned inventory investment which is Y - pl AE). Y-GDP pl AE U.L.L. 1326 1301 1307 1310 1320 1330 1340 1350 1360 1370 1380 1319 1325 1331

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Answer 1

(a)

Y	C	S=Y-C	PI	PAE= C+I	U.I.I= Y-AE
1310	1301	9	25	1326	-16
1320	1307	13	25	1332	-12
1330	1313	17	25	1338	-8
1340	1319	21	25	1344	-4
1350	1325	25	25	1350	0
1360	1331	29	25	1356	4
1370	1337	33	25	1362	8
1380	1343	37	25	1368	12

(b) MPC = (Change in C/Change in Y) = (6/10)= 0.6

MPS = 1-MPC = 1-0.6= 0.4

(c) Equilibrium level of GDP is 1350 i.e where Y=PAE.

(d) At the equilibrium level of GDP savings equals investment and there is no unplanned inventory investment.