Economics
Economics
5th Edition
ISBN: 9781319066604
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
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Chapter 26, Problem 9P
To determine

To determine: The aggregate inventory investment and unplanned inventory investment according to given data.

Concept Introduction:

Gross Domestic Product (GDP): It is defined as the value of output which is produced inside the border of a country in the given interval of time.

The formula to calculate change in GDP is:

    Economics, Chapter 26, Problem 9P , additional homework tip  1

Here,

  • Economics, Chapter 26, Problem 9P , additional homework tip  2is autonomous spending
  • MPC is marginal propensity to consume.

Marginal Propensity to Consume (MPC): It is defined as the change which occurs in total consumption level due to change in income.

The formula to calculate MPC is:

    Economics, Chapter 26, Problem 9P , additional homework tip  3

Here,

  • Economics, Chapter 26, Problem 9P , additional homework tip  4is change in income.
  • Economics, Chapter 26, Problem 9P , additional homework tip  5is change in consumption level.
  • MPC is marginal propensity to consume.

Multiplier: It is defined as the ratio of total change in gross domestic product due to change in the autonomous spending.

The formula to calculate multiplier is:

    Economics, Chapter 26, Problem 9P , additional homework tip  6

Here,

  • MPC is marginal propensity to consume.

Consumption Level (C): It is one of the largest components of GDP. The individual consumption depends on the disposable income.

Consumption Function: It shows relationship between disposable income of an individual and the consumption level.

The formula to calculate consumption function is:

    Economics, Chapter 26, Problem 9P , additional homework tip  7

Here,

  • C is consumption level.
  • Economics, Chapter 26, Problem 9P , additional homework tip  8is autonomous consumption.
  • Economics, Chapter 26, Problem 9P , additional homework tip  9is disposable income
  • MPC is marginal propensity to consume.

Autonomous Consumption: This is defined as the consumption level when the income of an individual is zero.

Planned Aggregate Spending: It is the summation of consumption level in an economy and the planned investment.

The formula to calculate planned aggregate spending is:

    Economics, Chapter 26, Problem 9P , additional homework tip  10
Here,
  • C is consumption level.
  • Economics, Chapter 26, Problem 9P , additional homework tip  11is the planned investment spending.
  • AE is the planned aggregate spending.

Unplanned Inventory Investment: When the real sales are greater or lesser than the amount of sales which are estimated by the firm. Then it leads to unplanned inventory investment.
The formula to calculate unplanned inventory investment is:

    Economics, Chapter 26, Problem 9P , additional homework tip  12

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