Problem 2
Which of the following statements is correct? (a) Any tax is a tax on jobs because it reduces aggregate demand. (b) Provided the government spends the tax revenue, the impact of higher spending outweighs the adverse demand effect of higher taxes. (c) Autonomous consumption demand is directly related to iconsumer confidence. (d) All the above statements could be true, depending on the other things assumed equal.
Problem 3
Suppose firms are initially surprised by changes in demand. (a) When demand, falls, what is the initial effect on stocks of unsold goods held by firms? (b) What do firms plan to do to stocks as soon as they have time to adjust production? Does this reduce or increase the initial fall in demand? (c) Once stocks have been adjusted, what then happens to production and output?
Problem 6
Assume that an economy is in equilibrium. Planned investment is \(£ 100\). The \(M P C\) is \(0.6\). Suppose investment rises by \(£ 30\). (a) What happens to the equilibrium output? Now suppose people decide to save a higher proportion of their income: the consumption function changes from \(C=0.8 \mathrm{Y}\) to \(C=0.5 \mathrm{Y}\). (b) What happens to equilibrium income (planned investment being \(£ 100\) )? (c) What happens to the equilibrium proportion of income saved? Explain.
Problem 7
Assume that the economy is in equilibrium. The \(M P C\) is \(0.6\). Suppose investment demand rises by \(£ 30\). (a) By how much does the equilibrium output increase? (b) How much of that increase is extra consumption demand? Draw the corresponding diagram using planned investment and planned saving assuming that the initial output is 100 .
Problem 8
Suppose the consumption function is \(C=0.75 \mathrm{Y}\) and planned investment is 40 . (a) Draw a diagram showing the aggregate demand schedule. (b) If actual output is 100 , what unplanned actions will occur? (c) What is the equilibrium output? (d) Do you get the same answer using planned saving equals planned investment?
Problem 11
When could the paradox of thrift fail to be true?
Problem 12
Essay question 'The remarkably strong relationship between consumption and income confirms that most people want to spend most of their income as soon as they can. We are all material girls and boys at heart.' Is the inference justified?
Problem 13
Planned investment is 100 . Initially, the consumption function is \(C=100+0.8 \mathrm{Y}\). There are three ways in which greater pessimism about the future might affect behaviour: (a) planned investment falls from 100 to 50, (b) autonomous consumption falls from 100 to 50 , (c) the marginal propensity to consume falls from \(0.8\) to \(0.7\) as people save more of each unit of additional income. Draw a graph of each change and its effect on short-run equilibrium output.
Problem 14
Suppose your economy is going through a recession. Individuals desire to save more and spend less. How does the paradox of thrift explain the consequences of increased savings in your economy?
