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The income-expenditure diagram
C+Ip = AE
Planned investment , Ip
The above represents a 2 sector economy with only households and firms, so Y = C + I
1. If the economy produces at GDP 3 then what does the distance ?C? measure?
Distance ?C? means real GDP exceed spending. Unsold goods accumulate. It causes firms to cut production until the amount
they produce equals AE.
People save more and spend less. Company?s inventories start rising and they need cut productions.
2. What can you say about the value of savings and investment at GDP2?
Savings = Planned investment (leakages = planned injections.)
3. What is the autonomous variable in this case?
4. What does the slope of the consumption function measure?
The slope of the consumption function equals the MPC.
MPC is the fraction of the additional income that is spent.
MPC=the change in consumption divided by the change in income.
5. If the MPC in this case were 0.75, what would the simple Keynesian multiplier be?
6. How much extra autonomous demand would take the economy from GDP 2 to GDP 3?
(Expressed as an algebraic distance on the graph)
7. The fact that planned investment is shown as a horizontal line means that in this case investment
spending is induced or autonomous? Underline which one.
8. What does the distance ?A? measure?
Distance ?A? means Spending exceeds the amount produced. Company wants to produce more toward
This question was answered on: Dec 18, 2020
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Dec 18, 2020EXPERT
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