Consider the data presented in the table Actual aggregate Unplanned investment e

Question

Consider the data presented in the table Actual aggregate Unplanned investment expenditure or output (Y) Consumption Planned Government xports(inventory (billions of(C) (billionsinvestment spending (G) (NX) (billions change) (billions of $ Future output of $) of $ 250 320 390 460 530 (billions of ) (billions of $) 450 550 650 750 850 tendenc (Click to select) (Click to select) (Click to select) (Click to select) (Click to select) 115 100 45 a. What is the marginal propensity to consume for households in this economy? Instructions: Enter a numerical value rounded to two decimal places as necessary

Explanation / Answer

(1) Working notes:

(a) Planned investment (Ip), Government spending (G) and Net exports (NX) are assumed autonomous.

(b) Planned aggregate expenditure (PAE) = Consumption (C) + Ip + G + NX

(c) Unplanned inventory investment = Actual output (Y) - PAE [Positive if Y > PAE & Negative if Y < PAE]

(d) If Unplanned inventory investment > (or < ) 0, Future output will decrease (or increase).

Therefore:

(2) MPC = Change in Consumption / Change in Y

= (320 - 250) / (550 - 450)

= 70 / 100

= 0.70

Y ($billion) C ($Billion) Ip ($Billion) G ($Billion) NX ($Billion) PAE ($Billion) Unplanned Inventory Investment ($Billion) Future Output Tendency 450 250 115 100 45 510 -60 Increase 550 320 115 100 45 580 -30 Increase 650 390 115 100 45 650 0 No Change 750 460 115 100 45 720 30 Decrease 850 530 115 100 45 790 60 Decrease

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---