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Why do companies cut production when they find that their

1. Calculate the value of the consumption function at each level of disposable income in Table 22-1 if a = 100 and mpc = 0.9.

2. Why do companies cut production when they find that their unplanned inventory investment is greater than zero? If they didn’t t cut production, what effect would this have on their profits? Why?

3. Plot the consumption function C = 100 + 0.75Y on graph paper.

a. Assuming no government sector, if planned investment spending is 200, what is the equilibrium level of aggregate output? Show this equilibrium level on the graph you have drawn.

b. If businesses become more pessimistic about the profitability of investment and planned investment spending falls by 100, what happens to the equilibrium level of output?

4. If the consumption function is C = 100 + 0.8Y and planned investment spending is 200, what is the equilibrium level of output? If planned investment falls by 100, how much does the equilibrium level of output fall?

5. Why are the multipliers in Problems 3 and 4 different? Explain intuitively why one is higher than the other.

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