7. A graphical approach to equilibrium GDP in a private closed economy Aa Aa The

Question

7. A graphical approach to equilibrium GDP in a private closed economy Aa Aa The following graph shows the consumption function (CF) for a hypothetical private closed economy and a 45-degree line along which planned aggregate spending equals real GDP. Recall that a private closed economy does not have government and does not trade with the rest of the world. In a private closed economy, real GDP is equal to disposable income PLANNED AGG. SPENDING (Billions of dollars) 800 750 Degree C +Ipl1 700 Equilibrium 1 650 600 550 500 450 400 CIp12 Equilibrium 2 400 450 500 550 600 650 700 750 800 REAL GDP (Billions of dollars Help Clear All Clear ALL At the current real interest rate, the level of planned investment in this economy is equal to $75 billion at each level of real GDP. Use the blue line (circle symbols) to plot this economy's initial planned aggregate spending line, (C + Iplanned)1. Then, use the black point (X symbol) to indicate this economy's initial equilibrium real GDP. Dashed drop lines will automatically extend to both axes. (Hint: You can see two of the coordinates along the consumption function by mousing over the green triangles on the graph.) At the level of equilibrium real GDP you just indicated, the level of saving is equal to $50 billion $100 billion 25 billion firms will $75 billion At an output level of $700 billion, planned aggregate spending will be experience in business inventories. Firms will respond

Explanation / Answer

1. 75 billion

2. 500, surplus

3. 600, deficit

4. excess of, leaving production unchanged

5. 575, shortage, increasing production

6. 7.5

7. less than, Decreasing production

8. shortage of, an unplanned decrease

9. 2.5

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