Explain the difference between autonomous and induced expenditures. Give examples of each.

The consumption function we studied in the chapter predicted that consumption would sometimes exceed disposable personal income. How could this be?

The consumption function can be represented as a table, as an equation, or as a curve. Distinguish among these three representations.

The introduction to this chapter described the behavior of consumer spending at the end of 2008. Explain this phenomenon in terms of the analysis presented in this chapter.

Explain the role played by the 45-degree line in the aggregate expenditures model.

Your college or university, if it does what many others do, occasionally releases a news story claiming that its impact on the total employment in the local economy is understated by its own employment statistics. If the institution keeps accurate statistics, is that possible?

Suppose the level of investment in a certain economy changes when the level of real GDP changes; an increase in real GDP induces an increase in investment, while a reduction in real GDP causes investment to fall. How do you think such behavior would affect the slope of the aggregate expenditures curve? The multiplier?

Give an intuitive explanation for how the multiplier works on a reduction in autonomous aggregate expenditures. Why does equilibrium real GDP fall by more than the change in autonomous aggregate expenditures?

Explain why the marginal propensity to consume out of a temporary tax rebate would be lower than that for a permanent rebate.

Pretend you are a member of the Council of Economic Advisers and are trying to persuade the members of the House Appropriations Committee to purchase $100 billion worth of new materials, in part to stimulate the economy. Explain to the members how the multiplier process will work.

Suppose the following information describes a simple economy. Figures are in billion of dollars.

The graph below shows a consumption function.

Figure 13.20. 

For the purpose of this exercise, assume that the consumption function is given by C = $500 billion + 0.8Y_d. Construct a consumption and saving table showing how income is divided between consumption and personal saving when disposable personal income (in billions) is $0, $500, $1,000, $1,500, $2,000, $2,500, $3,000, and $3,500.

The graph below characterizes a simple economy with only two components of aggregate expenditures, consumption and investment.

Figure 13.21. 

Explain and illustrate graphically how each of the following events affects aggregate expenditures and equilibrium real GDP. In each case, state the nature of the change in aggregate expenditures, and state the relationship between the change in AE and the change in equilibrium real GDP.

Mary Smith, whose marginal propensity to consume is 0.75, is faced with an unexpected increase in taxes of $1,000. Will she cut back her consumption expenditures by the full $1,000? How will she pay for the higher tax? Explain.

The equations below give consumption functions for economies in which planned investment is autonomous and is the only other component of GDP. Compute the marginal propensity to consume and the multiplier for each economy.

Suppose that in Economies A and B the only components of aggregate expenditure are consumption and planned investment. The marginal propensity to consume in Economy A is 0.9, while in Economy B it is 0.7. Both economies experience an increase in planned investment, which is assumed to be autonomous, of $100 billion. Compare the changes in the equilibrium level of real GDP and the shifts in aggregate demand this will produce in the two economies.

Assume an economy in which people would spend $200 billion on consumption even if real GDP were zero and, in addition, increase their consumption by $0.50 for each additional $1 of real GDP. Assume further that the sum of planned investment plus government purchases plus net exports is $200 billion regardless of the level of real GDP.

Suppose the aggregate expenditures curve in Numerical Problem 9 is drawn for a price level of 1.2. A reduction in the price level to 1 increases aggregate expenditures by $400 billion at each level of real GDP. Draw the implied aggregate demand curve.