Assignment)2)–)Macroeconomics)
Mayank)Sharma)
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Q1.)!
a))If!the!interest!rate!falls!as!a!result!of!Bank!of!Canada!policy!the!planned!investment!spending!will!
increase!since!the!cost!of!borrowing!will!fall.!
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b))If!the!firms!are!forced!to!upgrade!or!replace!their!machinery!the!level!of!planned!investment!spending!
will!increase.!
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c))If!baby!boomers!begin!to!retire!in!large!numbers!and!reduce!their!savings!the!interest!rates!will!rise!and!
the!planned!investment!spending!will!fall.!
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Q2.)
1))If!consumer!spending!is!$250!billion!and!the!marginal!propensity!to!consume!is!2/3,!the!aggregate!
consumption!is-!
C!=$250!billion!+!2/3!x!YD!
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AE!(Planned)!=!C!+!I!(Planned)!
AE!=!($250!billion!+!2/3!x!YD)!+!$350!billion!
AE!=!600!billion!+!2/3!YD!
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2))Real!GDP!=!$600!billion!
!!!!Planned!aggregate!spending!=!$600!+!2/3!x!$600!billion!=!$1000!billion!
!!!!Unplanned!Inventory!=!Real!GDP!–!Planned!aggregate!spending!=!$400!billion!
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3))Y*!shows!up!where!real!GDP!equals!planned!aggregate!spending.!As!seen!in!the!graph!above,!real!GDP!is!
equal!to!$1800!billion.!
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4))The!value!of!the!multiplier!is!=!1/(1-2/3)!=!3!
CF!
AE!(Planned)!
Real!GDP!($!billions)!
Consumer!Spending!($!billions)!
B!
1800!
$300!
$250!
600!
1800!
5))If!planned!investment!spending!rises!to!$450!billion! (increase!of!$100!billion!in!planned!
investment!spending),!Y*!will!rise!by!$300!billion! (multiplier!=!3)!to!$2100!billion.!
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Q3.)
a))As!an!economist!this!news!is!encouraging.!Businesses!and!customers!alike!base!their!
investment/spending!on!how!confident!they!are!about!the!future.!If!consumers!have!an!optimistic!outlook!
then!automatically!spending!will!rise!and!vice!versa.!A!rise!in!the!consumer!confidence!shows!that!
consumers!are!more!optimistic!in!May!than!they!were!in!April!2017.!!
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b))A!rise!in!consumer!confidence!leads!to!a!rightward!shift!of!the!aggregate!demand!curve.!This!will!
increase!real!GDP!from!Z1!to!Z2!and!increase!the!aggregate!price!from!P1!to!P2.!
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P1!
P2!
E2!
Aggregate!Price!
