Principles of Economics: Problems: Income-Expenditure Framework: Income and Expenditure Disequilibrium
Principles of Economics: Problems: Income-Expenditure Framework: Disequilibrium III

Principles of Economics: Problems: Income-Expenditure Framework: Income and Expenditure Disequilibrium II

Consider an economy like the U.S., only with all planned spending categories in round numbers:

  • C--consumption spending on domestically-produced goods--$9 trillion/year
  • I--business investment spending--$2 trillion/year
  • G--government purchases--$2 trillion/year
  • X--exports of goods and services--$2 trillion/year
  • Y--total projected income--$15 trillion/year

    1. What is total planned spending E in this economy this year?

    2. Suppose irrational exuberance pushes business investment spending up to $3 trillion/year this year as businesses decide they can spend down their cash reserves. What do you expect to happen?

3. Suppose irrational pessimism pushes business investment spending down to $1 trillion/year this year as businesses decide they need to cut back and build up their cash reserves. What do you expect to happen?

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