Question

2. Let capital investment=10, planned inventory investment=10, consumption=120 when income=100, consumption=200 when income=200. planned and unplanned inventory chang (a) Complete the table below. must be equal to savi: Unplanned Actual/ Actual inventory inventory investment change 100 200 300 400 (b) What are the MPC, MPS, and multiplier? ..................... (c) What are the consumption function and saving function? 1001 100 SAL (d) Draw the AE curve and indicate the equilibrium in the AE diagram. +40+ +407 (e) Draw the investment curve and saving curve and indicate the equilibrium in the S/I diagram. 100 (f) If capital investment is changed to 30, (i) complete the table below. AE Unplanned inventory investment Actual inventory change Actual investment 100 200 300 400 (ii) Draw the new AE curve and indicate the new equilibrium in the AE diagram. (iii) Draw the new investment curve and saving curve and indicate the new equilibrium in the S/I diagram.

Answer 1

Table showing macro variables and Equilibrium

Y	C	S (Y-C)	I (Capital investment+ planned inventory)	AE ( C+ I)	Unplanned Inventory ( Y- AE)	Actual Inventory change ( Planned + unplanned inventory change)	Actual investment = S
0	40	-40	20	60	-60	-	-40
100	120	-20	20	140	-40	20	-20
200	200	0	20	220	-20	20	0
300	280	20	20	300	0	20	20
400	360	40	20	380	20	20	40

b)Mpc= 0• 8{ (120-40)/100-0} and so on---

Mps= 1-Mpc

1-0•8= 0• 2

Multiplier ( K)= 1/(1-Mpc)

1/(1-0•8)= 5

MPC=0•8,Mps=0•2, K= 5

C) Consumption Function= autonomous Consumption + Mpc(income)

C bar + Mpc(y). ( C bar or autonomous Consumption is Consumption at zero income level)

C=40+0•8Y

S= - C bar+ Mps(y). ( Where - C bar = dissaving or borrowing at zero income )

S= -40+0•2Y

Consumption Function-----40+0•8Y

Saving Function--------. (-40)+0•2Y

f(1) If capital investment is changed to 30-----

Y(c+s)	I( capital+ inventory)	AE	Unplanned Inventory	Actual Inventory change	Actual investment ( s)
0	40	80	-80	-	-40
100	40	160	-60	20	-20
200	40	240	-40	20	0
300	40	320	-20	20	20
400	40	400	0	20	40 f

The above table shows the equilibrium level of income and output (300) where AE=AS or Y and S=I

y T flii) AS=y=((+5) SAD=C+I - AE AE=AS AD/AS 30 AS-Y-(C+5) - ADC+I ADAS 207 ADAS 3w yo INCOME/OUTPUT / EMPLOYMENT 100 200 7 300 40 INCOME OUTPUT EMPLOYMENT f(1 5/1 SEI SAI LU s/I I: 140 X X 300 INCOME (OUTPUT/Lmpis yng -01 INCOME / OUTPUT / EMPLOYMENT

f(11) see graph above, the Equilibrium level of income / output occurs where AE = AS, that is at 400

f(111) see graph , Equilibrium level occurs where saving= investment, that is at 400 level of income.