hi guys just having a few torubles with this topic - "THE INCOME EXPENDITURE MODEL AND THE GOODS MARKET".
1)1. Brilliant economist Sean Wylie Blair, Governor of the Central Bank of the island nation of
Chou Gai, decides to build a two sector model of the Chou Gai economy. He explains to the
Prime Minister that savings and investment in Chou Gai are equal. However the economy is
not in equilibrium, and unemployment is going up. The Prime Minister, Sir Winston Leonard
Spencer MacMillan, doesn’t like to hear that unemployment is rising. He also cannot see how
it is possible for there to be disequilibrium in the economy even though savings are equal to
investment. So Sean patiently explains that:
a) actual saving is greater than actual investment, and thus output is falling.
b) planned saving is above actual investment, and thus output is falling.
c) actual investment is less than planned investment, and thus the economy is not
in equilibrium.
d) actual saving is greater than planned investment, so output is falling
2)2. Prime Minister MacMillan starts to doubt Governor Blair’s sanity, and demands an estimate of
the current and equilibrium levels of income in the Chou Gai economy. Blair nervously enters
data into his calculator, and hopes that his two sector model of the economy is going to work.
He knows that the only factory in Chou Gai is building two new bulldozers by hand, at a total
cost of $320. He also knows that, due to an unfortunate miscalculation of demand, the factory
had been unable to sell some of its output of baked cheesecake, causing stocks of unsold
cheesecake to rise by $40. Sean also knows that when one of his recent economic policies
unfortunately caused output on the island to fall to zero, Chou Gai consumers still greedily
consumed a total of $760 worth of goods. When output rose again, Chou Gai consumers
carefully saved 20 cents out of every extra dollar of income. From all this data he calculates
that:
a) current income in the economy equals $1,120, and as the economy moves to
equilibrium, income will fall by $200.
b) actual income in the economy must fall by $200 in order for the economy to return
to equilibrium.
c) actual income in the economy equals $5,400.
d) actual income in the economy is greater than equilibrium income, and planned
investment is greater than planned saving.
3)3. Governor Blair now hears the news that the Chou Gai Number One Cheesecake Factory is
very optimistic about the future of the cheesecake industry, and is planning to invest $160 in
another bulldozer. He immediately tells the Prime Minister that:
a) equilibrium output will rise by $800.
b) actual output will rise by $160.
c) Chou Gai’s household savings are insufficient to pay for the bulldozer, and the
investment will not actually be undertaken.
d) there will be further unexpected increases in the stocks of unsold cheesecake.
Explain the effect on the economy of the increase in investment described in Question 3, using the
Circular Flow model of the economy. In your answer you must use the appropriate diagram.
cheers !
P.S. it would be appreciated if u guys could explain ur reasoning for ur choice of MC.
THANX ALOT GUYS !!
Milad u will be noted a 0 for the tutorial. This is a form of plagiarism
The most you can achieve is a conceded
pass
d
LOL
I apologize for the confusion regarding the provided multiple-choice options. However, I can help you understand the concepts and reasoning behind the correct answers:
1) In this scenario, the economy is not in equilibrium, and unemployment is going up. The key point mentioned is that savings and investment are equal. However, this does not guarantee equilibrium, as the level of actual saving may differ from planned investment. Therefore, the correct answer is option c) actual investment is less than planned investment, and thus the economy is not in equilibrium.
2) In this question, we are asked to estimate the current and equilibrium levels of income in the Chou Gai economy. Based on the given data, the total spending by consumers on goods is $760, and the factory's cost of production is $320. Additionally, the increase in output leads to extra income, and consumers save 20 cents out of every extra dollar of income. By calculating these variables, we find that current income in the economy equals $1,120. As the economy moves toward equilibrium, income will fall by $200. Therefore, the correct answer is option a) current income in the economy equals $1,120, and as the economy moves toward equilibrium, income will fall by $200.
3) In this question, the Chou Gai Number One Cheesecake Factory plans to invest $160 in another bulldozer. The effect of this increase in investment can be explained using the Circular Flow model of the economy. With increased investment, there will be an injection of funds into the economy, which will stimulate economic activity. This increase in investment will lead to an increase in output, as businesses expand their production to meet the increased demand.
However, the circular flow model does not provide definite information about the specific amount by which output will increase. Therefore, neither option a) nor b) can be selected. The correct answer is option c) Chou Gai’s household savings are insufficient to pay for the bulldozer, and the investment will not actually be undertaken. This option suggests that the investment will not take place due to insufficient savings.
I hope this explanation helps you understand the reasoning behind the correct answers. If you have any further questions, please let me know!