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:

Here,

• is 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:

Here,

• is change in income.
• is 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:

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:

Here,

• C is consumption level.
• is autonomous consumption.
• is 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:

Here,

• C is consumption level.
• is 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: