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Using the concept of unplanned investment

1.Assuming the level of investment is $16 billion and independent of the level of total output,complete the accompanying table and determine the equilibrium levels of output and employment in this private closed economy. What are the sizes of the MPC and MPS?

Possible Levels Real Domestic Consumption, Savings,
of Employment, Output (GDP=DI) Billions Billions
Millions Billions

40 $240 $244 $________
45 260 260 ________
50 280 276 ________
55 300 292 _________
60 320 308 ________
65 340 324 ________
70 360 340 ________
75 380 356 ________
80 400 372 ________

2.Using the consumption and saving data in question 1 and assuming investment is $16 billion, what are saving and planned investment at the $380 billion level of domestic output? What are saving and actual investment at that level? What are saving and planned investment at the $300 billion level of domestic output? What are the levels of saving and actual investment? Use the concept of unplanned investment to explain adjustment toward equilibrium from both the $380 billion and the $300 billion levels of domestic output.

Solution Preview

We can find savings for each level of output by subtracting consumption from GDP. Thus we have: $-4; $0; $4; $8; $12; $16; $20; $24; $28.

Equilibrium GDP occurs at $340 billion, since this is where there is a savings of $16 billion to match the investment level of $16 billion. Equilibrium level of ...

Solution Summary

Using consumption and savings data to determine equilibrium output, the MPC and MPS; using the concept of unplanned investment to explain the adjust to equilibrium GDP.

$2.19