Grasping Reality on TypePad, by Brad DeLong

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

• I--business investment spending--determined by business executives' "animal spirits"--$3 trillion/year
• G--government purchases--determined by politics--$3 trillion/year
• T--net taxes and transfers--determined by politics--$3 trillion a year
• X--exports of goods and services--determined by foreigners--$3 trillion/year
• C--consumption spending on domestically-produced commodities--determined by households according to the equation: C = c₀ + c_y(Y - T)

• Y--total projected income--$14T

  1. Suppose c₀ = 0 and c_y = 0.6. What is total planned expenditure E = C + I + G + X? Is it equal to planned income? What are people planning to do with respect to their holdings of cash?

  2. Suppose c₀ = $3 trillon and c_y = 0.4. What is total planned expenditure E = C + I + G + X? Is it equal to planned income? What are people planning to do with respect to their holdings of cash?

  3. Suppose c₀ = $3 trillion and c_y = 0.6. What is total planned expenditure E = C + I + G + X? Is it equal to planned income? What are people planning to do with respect to their holdings of cash?

4. Suppose c₀ = 0 and c_y = 0.4. What is total planned expenditure E = C + I + G + X? Is it equal to planned income? What are people planning to do with respect to their holdings of cash?