# 1. How is equilibrium defined in the simple model of GDP? What adv...

## Question

1. How is equilibrium defined in the simple model of GDP? What advantage can economic analysts get from defining the level of equilibrium and then comparing it to the actual level of GDP?
2. What is the major determinant of consumption behavior in the expenditures model of GDP? What is the resulting linear equation for the consumption relationship? Now, draw the consumption function, being sure to mark each axis.
3. Define the MPC end MPS in words, and in mathematics.
4. Assume that the level of autonomous consumption rises. Show in a graph what happens to the consumption function.
5. Assume that the size of the MPC falls. Show in a graph what happens to the consumption function.
6. If the percentage of income saved rises, what, if anything, must happen to the percentage of income spent? Why?
7. With E (expenditures) on the vertical axis, and Y (GDP) on the horizontal axis, draw the function that illustrates the level of planned investment (Ip) in any short-run period of time. With the same axes, what happens to the consumption function once you add planned investment and generate the Ep (in this case, C+Ip) line? Is the slope the same for C+Ip as for C? Why?
8. Where does the money to finance corporate investment come from? If households save more of their income in a given short-run period than firms expected, what automatically (if anything) happens to planned investment? To total investment (planned plus unplanned)?

## Solution Preview

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1. How is equilibrium defined in the simple model of GDP? What advantage can economic analysts get from defining the level of equilibrium and then comparing it to the actual level of GDP?

In the simple model of GDP, equilibrium exists at a point where the planned spending of all the economic agents(who include the households, firms, government, and foreigners) is equal to the real output of the economy which is referred to as RGDP. The advantage of defining the level of planned spending and level of equilibrium and then comparing it with the actual level of GDP would enable the economists to forecast the movements in Y- the output level....

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