a. The left-hand diagram says that if GDP were equal to 0E, consumption spending

Question

a.      The left-hand diagram says that if GDP were equal to 0E, consumption spending would be ____ (hint: what line?).  With GDP at 0E, saving would equal to ____ (hint: what line?).

b.     If GDP were to fall to 0A, however, then C spending would be equal to ____ (hint: what line?), and S would be equal to ____ (hint: what line?).

c.      Following the consumption function: C = 95 + 0.75Y, what is the level of economic output if consumption spending is equal to income? What point is it in the graphs?

d.     Planned investment ? was pegged at 150, which is about equal to the distance HJ. Suppose planned investment flows increase by 70, thereby moving to economic level output 0E, by how much did output change from level 0A to 0E? What is the output level 0E?

Explanation / Answer

a. EK, KM<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

b.AJ, JH

c. C=95 + 0.75Y, If C=Y, then,

Y=95 + 0.75Y, on solving we will get,

Y=380

d. If we include plaaned investment in the model then total output in the economy is,

Y=C+I=95+0.75Y+I

Then change in output bought by the change in plannd investment is,

?Y=0.75?Y+?I=70/(1-0.75)

?Y=280

Therefore, the output level at OE is,

Y=C+I

Y=95+0.75Y+I

Y={95+(150+70)}/(1-0.75)

Y=1260

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