Economics
5th Edition
ISBN: 9781319066604
Author: Paul Krugman, Robin Wells
Publisher: Worth Publishers
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Question
Chapter 26.A, Problem 2P
To determine
To determine: The expression for planned aggregate spending and the value of the multiplier.
Concept Introduction:
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 disposable income.
The formula to calculate MPC is:
Here,
is change in disposable 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 how the change in disposable income of an individual changes 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: It 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. 
is the planned aggregate spending.
Unplanned Investment: All those investments that businesses do not intend to take in given time. It is certain due to some external factors like fall in interest rate and increase in future profitability.
The formula to calculate unplanned investment is:
Here,
- YDis disposable income.
is unplanned investment spending. - AE is the planned aggregate spending.
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