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Chapter 21: Q 11. (page 566)

Inventories typically increase starting at the beginning of recessions, and begin to decline near the end of recessions. What does this say about the relationship between planned spending and aggregate output over the business cycle?

Short Answer

Expert verified

This states that planned spending & aggregate output are directly related, and they are inversely related to inventory level.

Step by step solution

01

Step 1. Introduction 

Business Cycle denotes periodic & cyclical growth, decline in output & GDP level of an economy.

Recession refers to decline in overall level of economic activity. It is characterised by two consecutive quarters of economic decline, paired with increase in unemployment levels.

02

Step 2. Explanation

At the beginning of recessions, consumers' planning to buy has reduced, & is lesser than firms planning to produce. This leads to more than desired inventory accumulation.

  • Here, lesser planned spending & consecutively lesser Aggregate Demand decrease the equilibrium output level.

At the end of recessions - when the economy is verge of recovery : consumers are planning to buy more, with firms retaining previous tendencies of lesser planned production. This leads to less than desired inventory accumulation.

  • Here, more planned spending & consecutively more Aggregate Demand increases the equilibrium output level.

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Most popular questions from this chapter

During and in the aftermath of the financial crisis of 2007–2009, planned investment fell substantially despite significant decreases in the real interest rate.

What factors related to the planned investment function could explain this?

Calculate the value of the consumption function at each level of income in the following table if autonomous consumption = 300, taxes = 200, and mpc = 0.9.

If firms suddenly become more optimistic about the profitability of investment and planned investment spending rises by \(100 billion, while consumers become

more pessimistic and autonomous consumer spending falls by \)100 billion, what happens to aggregate output?

Go to the St. Louis Federal Reserve FRED database, and find data on Personal Consumption Expenditures (PCEC), Personal Consumption Expenditures: Durable Goods (PCDG), Personal Consumption Expenditures: Nondurable Goods (PCND), and Personal Consumption Expenditures: Services (PCESV).

a. Using the most recent data, what percentage of total household expenditures is devoted to the consumption of goods (both durable and nondurable goods)? What percentage is devoted to services?

b. Given these data, which specific component of household expenditures would be most impacted by a reduction in overall household spending? Explain.

If the marginal propensity to consume is 0.75, by how much would government spending have to rise to increase output by \(1,000 billion? By how much would taxes need to decrease to increase output by \)1,000 billion?
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