Question

where ginal pro modifica multiplie why this would likely be followed by an equally sudden increase in actual investment in inventories. c. Illustrate the event from part (b) in a 45°-line diagram Consider the following diagram of the AE function and the 45° line. AE = Y 6 PROBLEM 8 Consider sumptios ues are e AE Dispos Incor (YD Desired Aggregate Expenditure 100 Y Actual National Income 80 a. Suppose the level of actual national income is Y. What is the level of desired aggregate expenditure? Is it greater or less than actual output? Are inven- tories being depleted or accumulated? b. If actual income is Y1, explain the process by which national income changes toward equilibrium. C. Suppose the level of actual national income is Y2. What is the level of desired aggregate expenditure? Is it greater or less than actual output? Are inven- tories being depleted or accumulated? d. If actual income is Y, explain the process by which national income changes toward equilibrium. The "Paradox of Thrift" is a famous idea in macro- economics-one that we will discuss in later chapters. The basic idea is that if every household in the econ- omy increases its level of desired saving, the level of a. Com each b. Con each c. Writ func d. Plot Wh: This the tab a. Con able 6 dias
question 5, can you also explain it very thoroughly how you got the answer and the steps to get the answer such as step 1, 2, 3 that would be much appreicated thank you very much.

Answer 1

a. National income - Y_1. The level of desired aggregate expenditure is the point 'b' (because that is what is needed when you consider autonomous expenditure - the minimum expenditure needed to survive even when income is 0). So even when the national income allows expenditure at point 'a', because of autonomous expenditure, the consumption is at 'b'.It is therefore greater than the actual output. Inventories are being depleted. This is because producers have to bring out their investment goods and convert them into consumption goods in order to produce more so that consumers have enough for their needs,

b. When national income is Y₁, the economy is at a point where it consumes more than it produces.   So more inventories are brought under production of consumer goods. To do this, producers employ more factors of production. Thus, both national income and employment increase. When this happens, both national income and aggregate expenditure rise towards a higher equilibrium point, 'c'.

c.At national income Y₂, level of desired aggregate expenditure is at point 'd'. (this is because, at higher levels of income, individuals do not consume their entire income, but a part of it goes into saving.) It is less than the actual output level 'e'. Inventories are being accumulated. This is because consumers do not consume whatever is produced.

d. At national income Y₂,  the economy is at a point where consumers do not consume all that is produced. So, a lot of production remains unsold. That is to say, producers' actual investment is more than what is needed. Therefore they lay off workers. Production decreases, so do employment and national income. National income declines till it reaches a lower equilibrium point at 'c'.