Consider a simple economy with no government or external sector. Assume that in this economy the consumption (and thus saving) plans of households are always realized. Assume for the current period this economy is characterized by the following data:Y = 2800, Cp = 1800 and Ip = 400where Y is output, Cd is consumption and Ip is planned investment. In this caseGroup of answer choicesoutput is at its equilibrium level but planned saving and planned investment are unequalaggregate planned expenditure is greater than outputtotal investment recorded in the national accounts would be 1000output is not at its equilibrium level and total investment will be smaller than planned investment.
Question
Consider a simple economy with no government or external sector. Assume that in this economy the consumption (and thus saving) plans of households are always realized. Assume for the current period this economy is characterized by the following data:Y = 2800, Cp = 1800 and Ip = 400where Y is output, Cd is consumption and Ip is planned investment. In this caseGroup of answer choicesoutput is at its equilibrium level but planned saving and planned investment are unequalaggregate planned expenditure is greater than outputtotal investment recorded in the national accounts would be 1000output is not at its equilibrium level and total investment will be smaller than planned investment.
Solution 1
In this case, "output is not at its equilibrium level and total investment will be smaller than planned investment."
Here's a step-by-step explanation:
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In a simple economy with no government or external sector, the equilibrium is achieved when the total output (Y) equals the total planned expenditure. The total planned expenditure is the sum of planned consumption (Cp) and planned investment (Ip).
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Given the data, we can calculate the total planned expenditure as Cp + Ip = 1800 + 400 = 2200.
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Since the total output (Y = 2800) is greater than the total planned expenditure (2200), the economy is not in equilibrium.
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When output is greater than planned expenditure, it means that businesses have produced more goods than what was planned to be sold. The unsold goods are added to the inventories, which is considered as an unplanned investment.
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Therefore, the total investment (planned investment + unplanned investment) will be greater than the planned investment. However, since the unplanned investment is not desired by the businesses, we can say that the total investment is smaller than what businesses would like it to be, i.e., the planned investment.
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So, in this case, output is not at its equilibrium level and total investment will be smaller than planned investment.
Solution 2
In this case, output is not at its equilibrium level and total investment will be smaller than planned investment.
Explanation:
In a simple economy with no government or external sector, equilibrium is achieved when aggregate output (Y) equals aggregate planned expenditure. Aggregate planned expenditure is the sum of planned consumption (Cp) and planned investment (Ip).
Given the data: Y = 2800, Cp = 1800 and Ip = 400, we can calculate aggregate planned expenditure as Cp + Ip = 1800 + 400 = 2200.
Since aggregate planned expenditure (2200) is less than aggregate output (2800), the economy is not in equilibrium. This means that firms are producing more goods and services than are being demanded.
In this situation, the excess output will end up as unplanned inventory investment. Therefore, total investment (which includes both planned investment and unplanned inventory investment) will be greater than planned investment. However, because this inventory accumulation is unplanned, it's often seen as a less desirable form of investment. Hence, the statement "total investment will be smaller than planned investment" can be interpreted as saying that the desirable or effective investment is smaller than what was planned.
Similar Questions
Assume the economy is closed and there is no government. The aggregate demand components are described below:C = 100 + 0.6Y (1)I = 200 (2)Now there is a boost in investment, and total investment is now 300. What is the consumption of equilibrium?
Assume the economy is closed and there is no government. The aggregate demand components are described below:C = 100 + 0.6Y (1)I = 200 (2)Now there is a boost in investment, and total investment is now 300. What is the income of equilibrium?
In the Keynesian income-expenditure model, equilibrium income is necessarily equal to a multiple ofGroup of answer choicesthe exogenous component of planned aggregate expenditure which is partly dependent on the autonomous component of taxation when government is includedthe autonomous component of consumption, regardless of whether the economy is closed or openthe sum of investment, government expenditure and net exportsnone of the other alternatives are correct.
On the basis of following information, identify whether the economy is in equilibrium or not: (3)Sr. No. Particulars Amount(i)(ii)(iii)Autonomous Consumption and Investment Expenditure (A)Marginal Propensity to Save (MPS)National Income₹ 500 crores0.2₹ 4,000 crores
Adding an external sector to the Keynesian income-expenditure model implies that for equilibrium, in terms of leakages and injectionsGroup of answer choicesplanned saving cannot not be equal to planned investment if the sum of taxation and imports is diiferent from the sum of government expenditure and exportsplanned saving must equal planned investment but the budget balance and/or the trade balance cannot be equal to zeroit is not necessary for planned saving and planned investment to be equal but exports must be equal to importsit is not necessary for planned saving and planned investment to be equal but if they are unequal then either the budget or the trade balance must be equal to zero.
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