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Income-Expenditure Model

Income-Expenditure Model. 2001 recession. Great R ecession. Question 1. Determine the marginal propensity to consume and the marginal propensity to save. Question 2. Given: (all real dollars) Autonomous consumption spending =$250 billion Planned investment spending = $350 billion

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Income-Expenditure Model

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  1. Income-Expenditure Model

  2. 2001 recession

  3. Great Recession

  4. Question 1 Determine the marginal propensity to consume and the marginal propensity to save.

  5. Question 2 Given: (all real dollars) Autonomous consumption spending =$250 billion Planned investment spending = $350 billion The marginal propensity to consume = 2/3

  6. Question 2 • Plot the consumption function and aggregate expenditures • What is the value of Y* (equilibrium GDP)? • What is unplanned inventory investment when real GDP = $600 billion? • What is the value of the multiplier? • If planned investment increases to $450 billion, what is the new value of Y*?

  7. Question 2 • What is Y* (equilibrium GDP)? Y*=$1,800 billion • What is unplanned inventory investment when real GDP = $600 billion? Iunplanned = -$400 billion • What is the value of the multiplier? Multiplier=3.0 • If planned investment increases to $450 billion, what is the new value of Y*? Y** = $2,100 billion

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