Part-2 chapter-8 

Aplia Homework: Aggregate Demand and the Powerful Consumer

1. Categories of expenditures

Darnell and Eleanor Cohen live in Swarthmore, PA. Their son, Jacques, owns his own plumbing business.

For each of the following transactions, identify whether it is included in the calculation of U.S. GDP as part of consumption (C), investment spending (I), government purchases (G), exports (X), or imports (IM). Check all that apply.

Note: A product’s inclusion in one category does not necessarily imply that it is excluded from other categories.

2. The circular flow of income and expenditure

The income and expenditure approaches to measuring a nation’s GDP can be combined using the circular flow model.

Categorize each flow in the following table as part of either aggregate demand or national income.

While national income and domestic product must be equal, income must also equal expenditure for each of the six sectors in the circular flow diagram: firms, consumers, government, financial system, investors, and the “rest of the world.” For example, the amount of ________ flowing into the consumers sector must equal the amount of _________ flowing out of this sector.

Categorize each flow in the following table as either an injection into the circular flow or a leakage from the circular flow.

3. National accounting identities

Let C stand for consumption spending, I for investment, G for government purchases, X for exports, IM for imports, DI for disposable income, and NT for net taxes.

Consider the following identity and answer the questions that follow.

Which of the following best characterizes the above identity?

            National income must equal domestic product.

            National income must equal the total amount of injections into the nation’s flow of Income and expenditures.

            Domestic product must equal the total amount of leakages from the nation’s flow of income and expenditures.

            National income must equal the total amount of leakages from the nation’s flow of income and expenditures.

True or False: Imports must equal exports.

            True

            False

4. The meaning of saving and investment

Classify each of the following based on the macroeconomic definitions of saving and investment.

5. Graphing the consumption from the MPC

Consider a hypothetical economy in which the marginal propensity to consume (MPC) is 0.50. That is, if disposable income increases by $1, consumption increases by 50¢.

Suppose further that last year disposable income in the economy was $450 billion and consumption was $400 billion.

On the following graph, use the blue line (circle symbol) to plot this economy's consumption function based on these data.

From the preceding data, you know that the level of saving in the economy last year was _______ billion and the marginal propensity to save in this economy is ________.

Suppose that this year, disposable income is projected to be $650 billion. Based on your analysis, you would expect consumption to be ________ billion and saving to be _______ billion.

6. Consumption function and non-income determinants

The following graphs show an economy’s initial position at point A along its consumption function (CF).

Suppose tensions in the Middle East lead to a rapid increase in the price of oil, which raises the general price level.

Adjust the following graph by either shifting the consumption function curve or the initial point on the consumption curve (A) to illustrate the impact of a rise in the price level.

Now suppose that disposable income suddenly and unexpectedly decreases.

Adjust the following graph by either shifting the consumption function curve or the initial point on the consumption function curve (A) to illustrate the impact of a fall in disposable income.

7. The consumption function

Consider a country with the national income of $32 billion, the amount of taxes paid by households of $12 billion, and household consumption of $16 billion. Suppose that the marginal propensity to consume (MPC) is 0.7.

On the following graph, use the blue line (circle symbol) to plot the economy’s consumption function.

Note: Select and drag the line segment from the palette to the graph. Then select a point on the line segment and drag it to its desired position.

Suppose now the country’s national income increases to $35 billion.

Assuming the amount paid in taxes is fixed at $12 billion and MPC = 0.7, what will the new household consumption be?

            $23.7 billion

            $21.6 billion

            $22.3 billion

            $18.1 billion

8. Measuring GDP

The following table shows data on personal consumption expenditures, gross private domestic investment, exports, imports, and government purchases of goods and services for the United States in 2007, as published by the Bureau of Economic Analysis. All figures are in billions of dollars.

Fill in the missing cells in the table to calculate GDP by adding together the final demands of consumers, business firms, the government, and foreigners—a method of calculating GDP known as the expenditure approach.

9. The income approach

The following table shows macroeconomic data for a hypothetical country. All figures are in billions of dollars.

If you calculate GDP by adding together the final demands of consumers, business firms, the government, and foreigners (i.e., using the expenditure approach), GDP for this economy is _____ billion. Given this information, the statistical discrepancy between national income and net national product, obtained when GDP is measured using the expenditure approach, is _____ billion.

10. Comparing the expenditure and value-added approaches to calculating GDP

The expenditure and value-added approaches to calculating GDP arrive at the same final number, but they reach that number in different ways. To illustrate, consider the possible effects of the following set of transactions on GDP:

Compute the contribution to GDP of this set of transactions, using the expenditure approach, i.e., by assuming expenditures of buyers of final goods and services. Assume that Green Center Nursery receives the grass seed at no charge and that other costs are zero.

Which of the following would be included in the expenditure method of calculating GDP? Check all that apply.

            Al's Lawn Care spends $200.

            Larry spends $1,200.

            The Home Station spends $850.

The total contribution of these transactions to GDP, as measured by the expenditure approach, is _______.

Now use the following table to compute the contribution of these transactions to GDP by summing the values added at each stage of production.

The contribution to GDP that you found using the expenditure approach corresponds to the sum of the _______ at each stage of production.