Consider an economy where national income is $7,000 . autonomous consumption is $1,00 . and the MPC = 0.80 . Explain what will happen to national income in the following three cases: Case A: intended investment = $200 Case B: intended investment = $400 Case C: intended investment = $600
At the national income level of $7,000 . consumption spending will equal $6,600 (= $1,00 . + (0.80 ×
$7,000)). In equilibrium, consumption spending plus intended investment equals national income. In Case
A, aggregate expenditure is less than national income, so unplanned inventory investment causes national
income to fall. In Case B, aggregate expenditure equals national income, the economy is in equilibrium so
that national income doesn't change. In Case C, aggregate expenditure is greater than national income, so
unplanned inventory disinvestment occurs, causing national income to rise.
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