Question

In the Keynesian AE model, if the autonomous components of consumption, investment, government spending, and net export spending total $200 billion and the marginal propensity to spend is 0.8 , under what circumstances will unplanned changes in inventory be zero?

a. when output is $160 billion
b. when output is $250 billion
c. when output is $1000 billion
d. when output is $1600 billion

Answer 1

In the Keynesian AE model, unplanned changes in inventory will be zero when the equilibrium output is $250 billion.

Step-by-step explanation:

In the Keynesian AE model, the equilibrium level of output occurs when aggregate expenditure equals national income. The equation for aggregate expenditure (AE) is AE = C + I + G + X - M, where C represents consumption, I represents investment, G represents government spending, X represents exports, and M represents imports.

If unplanned changes in inventory are zero, it means that total spending is equal to the sum of autonomous components, which in this case is $200 billion. Given the marginal propensity to spend of 0.8, we can calculate the equilibrium level of output by dividing the sum of autonomous components by the marginal propensity to spend.

Therefore, the equilibrium level of output is $200 billion / 0.8 = $250 billion.