Chapter 21: Q 2. (page 556)
Why is inventory investment counted as part of aggregate spending if it isn’t actually sold to the final end user?
Inventory Investment is counted as a part of aggregate spending, as it is the spendings of 'firms' sector out of the economy.
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Go to the St. Louis Federal Reserve FRED database, and find data on Personal Consumption Expenditures (PCEC), Personal Consumption Expenditures: Durable Goods (PCDG), Personal Consumption Expenditures: Nondurable Goods (PCND), and Personal Consumption Expenditures: Services (PCESV).
a. Using the most recent data, what percentage of total household expenditures is devoted to the consumption of goods (both durable and nondurable goods)? What percentage is devoted to services?
b. Given these data, which specific component of household expenditures would be most impacted by a reduction in overall household spending? Explain.
If the consumption function is C = 100 + 0.75YD, I = 200, government spending is 200, and net exports are zero, what will be the equilibrium level of output?
What will happen to aggregate output if government spending rises by 100?
When the Federal Reserve reduces its policy interest rate, how, if at all, is the IS curve affected? Briefly explain.
In each of the following cases, determine whether the IS curve shifts to the right or left, does not shift, or is indeterminate in the direction of shift.
a. The real interest rate rises.
b. The marginal propensity to consume declines.
c. Financial frictions increase.
d. Autonomous consumption decreases.
e. Both taxes and government spending decrease by the same amount.
f. The sensitivity of net exports to changes in the real interest rate decreases.
g. The government provides tax incentives for research and development programs for firms.
“When the stock market rises, investment spending is increasing.” Is this statement true, false, or uncertain? Explain your answer.
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