Assignment:
Table: Aggregate Spending
|
Real GDP
|
YD
|
C
|
Iplanned
|
|
0
|
0
|
100
|
600
|
|
500
|
500
|
500
|
600
|
|
1000
|
1000
|
900
|
600
|
|
1500
|
1500
|
1300
|
600
|
|
2000
|
2000
|
1700
|
600
|
|
2500
|
2500
|
2100
|
600
|
|
3000
|
3000
|
2500
|
600
|
|
3500
|
3500
|
2900
|
600
|
|
4000
|
4000
|
3300
|
600
|
1. (Table: Real GDP) Suppose the economy has no government spending and no foreign trade. With no taxes and transfers, real GDP equals disposable income (YD). The data in the accompanying table show consumption spending (C) and planned investment (I planned).
a. What is the marginal propensity to consume in this economy?
b. At what level of real GDP will the economy find its income-expenditure equilibrium?
Short Answer Questions
2. Ted is looking to borrow money from a bank. He is told that the nominal rate is 8%; that includes expected inflation of 5% and a real interest rate of 3%. If there is unexpectedly high inflation over the term of this loan, will Ted be hurt or will the bank be hurt? Explain your answer.
3. How can autonomous consumption be greater than zero when disposable income equals zero?
4. Suppose the economy is in income-expenditure equilibrium. How will each of the following situations affect planned investment and unplanned inventory investment?
a. The Federal Reserve decreases interest rates.
b. Major economic indicators decrease business optimism about growth in real GDP.