Chapter 11: Q2. (page 426)
Why was it reasonable in June 2009 to predict that auto sales would improve in the near future?
The prediction in June 2009 regarding the auto sales rise was reasonable because the U.S. economy had begun to recover from the recession of 2007 around that time.
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Although economists believe that recessions typically begin as slumps in investment spending, they also believe that consumer spending eventually slumps during a recession. Explain why.
Consumer spending was sluggish in late 2007, and economists worried that an inventory overhang—a high level of unplanned inventory investment throughout the economy—would make it difficult for the economy to recover anytime soon. Explain why an inventory overhang might, like the existence of too much production capacity, depress current economic activity.
Suppose that problems in the capital markets make consumers unable either to borrow or to put money aside for future use. What implication does this have for the effects of expected future disposable income on consumer spending?
How does this story about General Motors help explain how a slump in housing—a relatively small part of the U.S. economy—could produce such a deep national recession?
a. Use a diagram like a Figure 11-11 to show what happens when there is an autonomous fall in planned aggregate spending. Describe how the economy adjusts to a new income-expenditure equilibrium.
b. Suppose Y* is originally \(500 billion, the autonomous reduction in planned aggregate spending is\)300 million ($0.3 billion), and MPC = 0.5. Calculate Y* after such a change.
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