Fiscal

1. Briefly define the following terms and explain the relationship between them.

MPC......................Multiplier

Marginal propensity to consume (MPC) : fraction of a change in income that is consumed, or spent.

MPC is the slope of the consumption function given by

Multiplier: The ratio of the change in the equilibrium level of output to a change in some autonomous variable.

The relationship between MPC and multiplier can be represented by the following equation.

Multiplier = =

Actual investment.................... Planned investment. Y=C+I

Actual investment: actual amount of investment that takes place; includes changes in inventories

Planned investment: additions to capital stock and inventory that are planned by firms.

Actual investment = Planned investment(Y=C+I) will cause inventory to remains unchanged and will have no effect on output

Actual investment > Planned investment(Y>C+I) will cause inventory to increase and output to fall

Actual investment < Planned investment(Y<C+I) will cause inventory to decrease and output to increase

Aggregate expenditure............. Real GDP

Aggregate expenditure(AE) The total amount the economy spends in a given period

Real GDP or aggregate output(Y) The total amount of goods and services produced in an econmy in a given period.

AE = Y when the economy is at equilibrium and there is no unplanned inventory change

They are also related by the consumption function in which the level of consumption is determined by the level of output(income).

Aggregate output................... Aggregate income

Aggregate output: The total quantity of goods and services produced in an economy in a given period

Aggregate income: The total income received by all factors of production in a given period

They are basically the same and are referred to as Y.

4a. At each level of output, calculate saving. At each level of output, calculate unplanned investment (inventory change). What is likely to happen...