Students Again

Explain the role of inventories in keeping actual aggregate expenditures (AE) equal to real production (real GDP).

Inventory is used as part of the investment plans of a business. They can either increase or decrease it. Inventory is usually planned; however there can sometimes be unplanned changes in inventory. When there is excess of sales over production resulting in an  unplanned decline in inventory, this will encourage firms to increase production. This will increase the GDP to equilibrium level. The opposite is true for a decrease in sales which lead to excess inventory. The firms will decrease production until equilibrium GDP is reached. Inventory allows the firms to increase or decrease production as needed in order to reach equilibrium. It acts as a balancing item that equates the actual amounts saved and invested in any period.

Why would economies with older average populations tend to have greater slopes of their C functions?

Older average population has acquired more money/wealth over their lifetime then the economies with younger average population. The more wealth, then it can be said that there is more consumption. Less household debt (mortgage is paid off) then it means more disposable income to use for consumption.

What is the level of saving if the MPC is equal to .9, disposable income rises from $800 to $900 and saving is originally $120 when income equaled $800.

MPC = (c - $680) / ($900 - $800)
.90 = (c - $680) / ($900 - $800)
(.90) * ($900 - $800) = (x - $680)
c = [(.90) * ($900 - $800)] + $680
c = [(.90) * ($900 - $800)] + $680
Consumption @ MPC .90 = $770
Saving @ MPC .90 = $900 (DI) - $770(C) = $130

or

MPS = (s - $120) / ($900 - $800)
.10 = (c - $120) / ($900 - $800)
(.10) * ($900 - $800) = (x - $120)
s = [(.10) * ($900 - $800)] + $120
s = [(.10) * ($900 - $800)] + $120
Saving @ MPS .10 = $130

The rest of the questions refer to this table:

Y       C      I      G       (EX-IM)
$100 $120 $20 $30    -$10
$300 $300 $20 $30    -$10
$500 $480 $20 $30    -$10
$700 $660 $20 $30    -$10

4. What is the value of the MPC in the economy described in the chart above?

MPC = ?C / ?Y
MPC = $180 / $200
MPC = .90

5. What is the value of the MPS in the economy described in the chart above?

MPC = .90
MPS = 1 - MPC
MPS = 1 - .90
MPS = .10

6. What is the value of the multiplier in the economy described in the chart above?

b = .90
MPI = ?IM / ?Y
MPI = $0 / $100
MPI = $0
Multiplier = 1 / (1- b + MPI)
Multiplier = 1 / (1- .90 + $0)
Multiplier = 10

7. What is the value of the autonomous consumption in the economy described in the chart above?

C= a +bY
$120 = a + .90($100)
a = $120 – (.90*$100)
a = $30

8. What is the value of equilibrium GDP?

Y       C     I      G       (EX-IM)   AE
$100 $120 $20 $30   -$10    $160
$300 $300 $20 $30   -$10    $340
$500 $480 $20 $30   -$10    $520
$700 $660 $20 $30   -$10    $700 – equilibrium GDP

9. If government decides to spend $20 more – what is the new level of GDP?

Add $20 to the equilibrium GDP since GDP = C +I + (EX-IM) +G

GDP = $720

10. What is the equation of the Consumption function (equation of the C Curve)?

C= a +bY