Question

a. Draw a graph showing the relationship between aggregate expenditure and GDP. Use your graph to...

a. Draw a graph showing the relationship between aggregate expenditure and GDP. Use your graph to show equilibrium GDP.

b. Show a point on your aggregate expenditure line where inventory investment is negative.

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Answer #1

A) the graph is shown below. As the income is increased, aggregate expenditure also increases. However aggregate expenditure is not zero when the income is zero because there is a certain autonomous expenditure even when there is no income. The equilibrium level of GDP is Y* at which the aggregate expenditure is equal to income.

B) point A on the graph indicates that aggregate expenditure is greater than income at this level of income. this implies that the investment is depleting fastly and there is currently negative inventory investment.

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