Exam 8: Aggregate Expenditure and Equilibrium Output

Determine what the level of unplanned investment would be under each of the following scenarios: a) aggregate output is greater than planned spending, b) aggregate output is equal to planned spending and c) aggregate output is less than planned spending.

Assume consumption is represented by the following: C = 400 + .75Y. Also assume that planned investment (I) equals 100.

Assume the following saving function and investment function: S = -200 + .25Y and I = 25. Calculate the equilibrium output level.

In the General Theory, Keynes argued that the amount of consumption undertaken by a household is directly related to its income. Explain what he meant.

Assume that at every level of output households reduce their level of saving by the same absolute amount. Explain what impact if any this will have on the value of the multiplier.

Explain what effect an increase in the marginal propensity to save will have on the slope of the planned aggregate expenditures line and on the size of the multiplier.

Explain why the multiplier that is calculated in the textbook and the size of the multiplier in the real world are likely to be different. What are the two reasons?

When planned aggregate expenditure exceeds aggregate output (income), there is an unplanned fall in inventories. Firms will increase output. This increased output leads to increased income and even more consumption. How long will this process continue?

Define the significance of equilibrium in the macroeconomics goods market.

What are the four determinants of consumption? Also, explain how a change in each would bring about a reduction in consumption.

Figure 23.2 -Using Figure 23.2 calculate aggregate saving at each income level.

Assume a consumption function that takes on the following algebraic form: C = $100 + .8Y. Assume that Y = $1000 what is the level of consumption at this income level.

Theoretically, what should happen to the value of the multiplier along a consumption function that is increasing at a decreasing rate?

-Using the above figure calculate the marginal propensity to consume between the aggregate income levels of $80 and $100. Also explain why this consumption function is linear.

List four determinants of aggregate consumption.

Assume an economy with the following consumption and investment function: C = 100 + .75Y I = 25 Based on this information fill in the following table: Put an asterisk next to the aggregate output level that shows equilibrium.

Explain what is meant by the multiplier and explain what variable (s) determines its size.

Critically evaluate the following statement. "People can spend more than their income by borrowing therefore the sum of the MPC and the MPS could actually be greater than one."