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Simplified Multiplier Model (Closed Economy without Government)
The Identity Symbol (≡) in National Accounts
National Income Identity in a Closed Economy without Government
In a simplified economic model of a closed economy without a government, the national income identity is expressed as . Here, Y is national income, C is consumption, I is planned fixed investment, and II is inventory investment. This relationship is an identity—meaning it is true by definition at all times—because total output (Y) by its construction includes both planned expenditures (C and I) and any unplanned changes in business inventories (II). This holds true even when the economy is not in equilibrium.
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Introduction to Macroeconomics Course
Ch.3 Aggregate demand and the multiplier model - The Economy 2.0 Macroeconomics @ CORE Econ
The Economy 2.0 Macroeconomics @ CORE Econ
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National Income Identity in a Closed Economy without Government
Aggregate Demand in a Closed Economy without Government
Modeling the Components of Aggregate Demand in a Demand-Side Model
Exogenous Investment in the Simplified Multiplier Model
Limitations of the Simplified Multiplier
Expanded Multiplier Model (Open Economy with Government, Trade, and Endogenous Investment)
In an economic model consisting only of households and firms, where there is no government activity or international trade, the marginal propensity to consume is 0.8. If firms in this economy decide to increase their planned investment by $50 billion, what will be the total resulting increase in the economy's aggregate output?
In a simplified economic model with no government or international trade, a decision by households to save a larger portion of any additional income they receive will lead to a larger overall impact on total output from any given change in investment spending.
An economy, which consists only of households and firms and does not engage in international trade, experiences a $100 million increase in planned business investment. Arrange the following events in the correct chronological order to illustrate the resulting economic process.
Analyzing an Economic Shock in a Simplified Economy
Explaining the Multiplier Mechanism
Assumptions of the Simplified Multiplier Model
In an economic model that includes only households and firms (with no government or international trade), an initial change in spending sets off a chain reaction. Match each term related to this process with its correct description.
In an economic model that only includes households and firms, with no international trade, a $20 billion increase in planned investment spending leads to a total increase in the economy's output of $100 billion. Based on this outcome, the marginal propensity to consume must be ___.
Evaluating the Simplified Economic Model
In a closed economy with no government sector, an initial increase in planned investment of $200 million occurs. If the marginal propensity to consume is 0.6, what is the increase in consumption spending that results from the second round of the multiplier effect?
GDP Expenditure Formula (National Income Identity)
National Income Identity in a Closed Economy without Government
An economist makes two statements about a simplified economy's total output (Y):
Statement A: Y ≡ C + I_p + I_u (where C is consumption, I_p is planned investment, and I_u is unplanned inventory investment)
Statement B: Y = C + I_p (where C + I_p represents total planned expenditure)
Which of the following correctly analyzes the relationship between these two statements?
Analyzing Economic Statements
Applying the National Income Identity
The statement 'Total Output = Total Expenditure' is a fundamental accounting rule that holds true at all times, even when firms experience unexpected changes in their inventories.
Match each macroeconomic equation with the statement that best describes its nature. (Assume a simple closed economy where Y=Output/Income, C=Consumption, S=Saving, I_p=Planned Investment, I_u=Unplanned Investment, S_p=Planned Saving)
Definitional vs. Conditional Economic Relationships
In a given year, a simplified closed economy without a government experiences a situation where firms' total production (Y) exceeds the total amount of goods and services that consumers (C) and firms (for planned investment, I_p) intended to buy. Which of the following relationships holds true by definition as an accounting rule in this specific scenario?
Correcting an Economic Misconception
An economist analyzes a simplified economy and finds that total production for the year was $10 trillion, while planned consumption was $7 trillion and planned investment was $2 trillion. The economist concludes: "Since planned spending ($9 trillion) does not equal production ($10 trillion), the fundamental accounting rule that 'Total Output is definitionally equal to Total Spending' is violated in this case."
Which of the following provides the most accurate critique of the economist's conclusion?
Transforming an Economic Equation
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Analysis of Output and Planned Spending
In a closed economy with no government, total output is $800 billion. Planned consumption spending is $600 billion, and planned fixed investment is $150 billion. Given this information, which statement accurately describes the situation according to the national income identity?
In a simplified closed economy with no government, the national income identity, which states that total output is equal to the sum of consumption, planned fixed investment, and inventory investment, only holds true when the economy is in equilibrium.
Calculating and Interpreting Inventory Investment
The Role of Inventory Investment in the National Income Identity
In a simplified closed economy with no government, firms produce a total output valued at $500 billion. During the same period, households plan to spend $350 billion on consumption, and firms plan to spend $100 billion on new capital equipment. Based on the national income identity for this period, which of the following conclusions is correct?
For a simplified economy with no government or international trade, match each economic scenario with the resulting change in business inventories.
In a simplified economy with no government or foreign trade, total production for the year is valued at $1,200 billion. During this period, households plan to spend $800 billion on goods and services, and firms plan to spend $350 billion on new equipment and structures. Based on this information, the unplanned change in business inventories is $____ billion.
In a simplified economy with no government or foreign trade, the total value of goods and services produced in a given period is greater than the total planned spending by households and firms on those goods and services. According to the definitional accounting relationship for total output, which of the following is a necessary consequence in that period?
In a simplified economy with no government or foreign trade, the total value of all goods and services produced during a year is $2,000 billion. In the same year, planned spending by households on consumption is $1,500 billion, and planned spending by firms on new capital is $400 billion. Based on this information, what is the most likely adjustment firms will make to their production levels in the subsequent period?