Question

Table 11.1 shows some data on consumption and income (output) Planned investment is autonomous, and occurs at the rate of $60 billion per period

Income and Consumption

Income (Output)	Planned Consumption	Planned Investment	Savings	Aggregate demand	Unplanned Inventory Change	Actual Investment
50	35
100	70
150	105
200	140
250	175
300	210
350	245
400	280

a) Calculate savings and aggregate demand at each level of income.

b) For each level of output, work out the unplanned change in inventory holdings and the rate of actual investment.

c)   If, in a particular period, income turned out to be $100 billion, how would you expect producers to react?

d) If, in a particular period, income turned out to be $350 billion, how would you expect producers to react?

e) What is the equilibrium level of income?

f)   What is the marginal propensity to consume?

g) If investment increased by $15 billion, what would be the change in equilibrium income?

h) Using the data of the completed table, use graph paper to plot the consumption function and aggregate demand schedule.

i) Add on the 45° line and confirm that equilibrium occurs at the same point suggested by your answer to (e) above.

j) Show the effect on equilibrium of an increase in investment of $15 billion.

Answer 1