626889391-Understanding-Macroeconomics-2nd-Edition

Macroeconomic Equilibrium: A Numerical Example

Scenarios Overview

• Scenario 1: Y = 700

  • Aggregate Spending (A) = 200 + 0.8Y = 200 + 560 = 760

  • A > Y (Aggregate spending > total production)

  • Unplanned decrease in inventories of 60

  • Result: Production increases, Y rises.

• Scenario 2: Y = 1,000

  • Aggregate Spending (A) = 200 + 0.8Y = 200 + 800 = 1,000

  • A = Y (Aggregate spending = total production)

  • No unplanned increase or decrease in inventories

  • Result: Equilibrium achieved.

• Scenario 3: Y = 1,200

  • Aggregate Spending (A) = 200 + 0.8Y = 200 + 960 = 1,160

  • A < Y (Aggregate spending < total production)

  • Unplanned increase in inventories of 40

  • Result: Production decreases, Y falls.

Graphical Representation

• The scenarios can be illustrated graphically.

• The equilibrium occurs where the aggregate spending curve (A) intersects the 45-degree line at an income level of Y = 1,000 (point 2).

• Points left of equilibrium indicate that A > Y, resulting in excess demand and unplanned reductions in inventories.

• Firms will respond by increasing production until equilibrium is restored.