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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?

Short Answer

Expert verified

Inventory Investment is counted as a part of aggregate spending, as it is the spendings of 'firms' sector out of the economy.

Step by step solution

01

Definition

Aggregate Demand or Aggregate Spending is the total value of goods & services, planned to be demanded by all the sectors of economy, during a period of time.

02

Detail Explanation 

Four sectors of economy contribute to following components of Aggregate Spending

  • Households incur Consumption expenditure
  • Firms incur Investment expenditure on fixed goods & inventory.
  • Government incurs expenditure on government purchases
  • Rest of the world has contribution to aggregate spending, in form of net earnings from net exports (ie exports - imports)

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Most popular questions from this chapter

If an increase in autonomous consumer expenditure is matched by an equal increase in taxes, will aggregate output rise or fall?

“When the stock market rises, investment spending is increasing.” Is this statement true, false, or uncertain? Explain your answer.

“Firms will increase production when planned investment is less than (actual) total investment.” Is this statement true, false, or uncertain? Explain your answer.

Consider an economy described by the following data:

C=\(4trillionI=\)1.5trillionG=\(3.0trillionT=\)3.0trillionNX=\(1.0trillionf=0

mpc = 0.8

d = 0.35

x = 0.15

a. Derive an expression for the IS curve.

b. Assume that the Federal Reserve controls the interest rate and sets the interest rate at r = 4. What is the equilibrium level of output?

c. Suppose that a financial crisis begins and f increases to f = 3. What will happen to equilibrium output? If the Federal Reserve can set the interest rate, then at what level should the interest rate be set to keep output from changing?

d. Suppose the financial crisis causes f to increase as indicated in part (c) and also causes planned autonomous investment to decrease to I = \)1.1 trillion. Will the change in the interest rate implemented by the Federal Reserve in part (c) be effective in stabilizing output? If not, what additional monetary or fiscal policy changes could be implemented to stabilize output at the original equilibrium output level given in part (b)?

Calculate the value of the consumption function at each level of income in the following table if autonomous consumption = 300, taxes = 200, and mpc = 0.9.
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