ECO 007: Economic Development

Module #6 Student Activity Sheets

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

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Lesson title: Aggregate Expenditures and National Income Materials:

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Lesson Objectives: Student Activity Sheets, calculator
1. Explain the relationship of aggregate expenditure to GDP and References:
national income. Economics by Bello, Camacho,

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2. Illustrate the effect of increase or decrease in consumption, Catelo, Cuevas and Rodriguez.
savings and investment spending on equilibrium income. 2009 edition

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https://courses.lumenlearning.com/
boundlesseconomics/chapter/intro

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ducing-aggregate-expenditure.

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A. LESSON PREVIEW/REVIEW
1) Introduction (2 min)
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Hello, buddy! Is it your routine to compare your spending habit to the level of your income or allowance? Or you
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are one of those people who love spending a lot even if the budget is not enough? Oooopsss! I don’t mean to
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hurt your feelings. I just want to stir you up because our topic for today has something to do with consumption,
investment and income. Cheer up buddy and let’s do this!
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B.MAIN LESSON
1) Activity 2: Content Notes (70 min)
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You can highlight important key words for you to clearly understand our topic for today.
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Aggregate Expenditure

In economics, aggregate expenditure is the current value of all the finished goods and services in
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the economy. It is the sum of all the expenditures undertaken in the economy by the factors during a
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specific time period. The equation for aggregate expenditure is: AE = C + I + G + NX.

Consumption (C): The household consumption over a period of time.

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Investment (I): The amount of expenditure towards the capital goods.

Government expenditure (G): The amount of spending by federal, state, and local governments.
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Government expenditure can include infrastructure or transfers which increase the total expenditure
in the economy.
Net exports (NX): Total exports minus the total imports.

The aggregate expenditure determines the total amount that firms and households plan to spend on
goods and services at each level of income.

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 ECO 007: Economic Development
Module #6 Student Activity Sheets

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

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Comparison to GDP
The aggregate expenditure is one of the methods that is used to calculate the total sum of all the economic

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activities in an economy, also known as the gross domestic product (GDP). The gross domestic product is
important because it measures the growth of the economy. The GDP is calculated using the Aggregate

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Expenditures Model.
An economy is at equilibrium when aggregate expenditure is equal to the aggregate supply (production)
in the economy. The economy is not in a constant state of equilibrium. Instead, the aggregate expenditure and

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aggregate supply adjust each other toward equilibrium.

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When there is excess supply over the expenditure, there is a reduction in either the prices or the quantity of the
output which reduces the total output (GDP) of the economy.

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In contrast, when there is an excess of expenditure over supply, there is excess demand which leads to an
increase in prices or output (higher GDP). A rise in the aggregate expenditure pushes the economy towards a
higher equilibrium and a higher potential of the GDP.

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In classical economics, AE = C + I where: C-consumption and I-investment.
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Question#1: How does Aggregate Question#2: Does higher

income or output (Y) leads to
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Expenditure (AE) responds to changes

in national income or output? higher consumption
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spending?
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 ECO 007: Economic Development
Module #6 Student Activity Sheets

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

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My dear student, allow me to Legend: Note: Investment of 50
show you a table for you to Y = income or output is autonomous which
C = consumption

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answer all the questions in means that it is not
I = investment affected by the level of
your mind.
AE = aggregate
national income.

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expenditure
Y C I AE

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0 50 50 100

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50 90 50 140
Analysis: The table shows that AE=C+I. As
100 130 50 180
you can notice, consumption spending tends
150 170 50 220 to be higher than income at relatively low level
200 210 50 260
Aof income. What does it mean? It implies that
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250 250 50 300 households still want to spend even without
300 290 50 340 income. This happens may be for basic
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necessities they need in their daily living.
350 330 50 380
There is also a positive relationship between
400 370 50 420
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aggregate expenditure and income which

450 410 50 460 means that as income increases, aggregate
500 450 50 500 expenditure also increases.
550 490 50 540
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600 530 50 580

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Formula: Marginal Propensity to Consume

MPC = change in consumption spending
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This is the equilibrium income which

change in income
represents the level of income in
Ex: MPC = 90 – 50
which the income is equal to
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50 – 0
aggregate expenditure. There is no
MPC = 0.80
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incentive for the firm to adjust

*This indicates that consumption spending
production.
goes up by 80 centavos for every one peso
If we put this in equation:
increase in income.
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AE= C+I and Y= AE, then Y= C+I

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 ECO 007: Economic Development
Module #6 Student Activity Sheets

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

Savings, Investment and Income

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On this part, we will discuss how savings affects equilibrium income. Just like an ordinary household, the

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country’s national income (denoted as Y) can be allocated for consumption (C) or savings (S).

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Equation: Y = C + S This equation implies that savings represent the component of an income that
is not spent for consumption. In other words, S = Y – C.

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Income (Y) Consumption (C) Investment (I) Savings (S)

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0 50 50 -50
50 90 50 -40

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100 130 50 -30
150 170 50 -20
200 210 50 -10
250 250
A 50 0
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300 290 50 10
350 330 50 20
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400 370 50 30
450 410 50 40
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500 450 50 50
550 490 50 60
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The table above shows the relationship of income, consumption, investment and savings. As you can observe,
income from 0 to 200 resulted to negative amount of savings. This means that income is not sufficient to finance
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planned consumption and also to have savings. In addition, savings tend to increase with income.
We can also establish the link between savings and equilibrium income by recalling that equilibrium requires
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Y = AE. Since Y = C + S and AE = C + I, then C + S = C + I. If we eliminate C on both sides of the equality, then
we arrive at an alternative equilibrium condition given by S = I. In other words, equilibrium also requires savings
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to be equal to investment.
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Investment and Income

We often hear or read about the concern of our economic managers over the level of investment in the country.
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Such concern is not too difficult to understand because investment spending today implies higher production
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capacity in the future. Suppose a firm or company decides to build a new factory. In the present period, the
spending of the company for materials and labor needed to construct the factory is treated as an investment.
This increase in investment also implies increase in aggregate expenditure. Since AE must equal to Y or income
in equilibrium, the result is an increase in equilibrium income of the country.

Based on the previous tables, the equilibrium income was 500 when investment spending was 50 pesos. Let’s
check what would happen to the equilibrium income if we will increase investment spending to 100 pesos.

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 ECO 007: Economic Development
Module #6 Student Activity Sheets

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

Income (Y) Consumption (C) Investment (I) Aggregate

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Expenditure(AE)
0 50 100 150

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50 90 100 190
100 130 100 230

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150 170 100 270
200 210 100 310

C
250 250 100 350
300 290 100 390

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350 330 100 430

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400 370 100 470
450 410 100 510
500 450 100 550
550 490 100 590
600 530
A 100 630
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650 570 100 670
700 610 100 710
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750 650 100 750

800 690 100 790
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As we can observe, an increase of 50 pesos on investment tends to raise equilibrium income by 250 pesos
(from 500 to 750 pesos). This outcome is a bit surprising at first but it can be explained by noting the relationship
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between consumption and income. The 50-peso increase in investment initially creates a 50-peso increase in
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income. This increase in income causes an increase in consumption spending. The result is higher aggregate
expenditure which in turn raises income. Subsequent increase in consumption leads to an increase in income
that is larger than the increase in investment. This effect is what we so called the concept of investment multiplier.
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The investment multiplier (ὰ1) measures the increase in equilibrium income for a one peso increase in investment
spending.
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Interpretation: Investment multiplier of 5 implies

Investment multiplier = change in equilibrium income
that for every 1peso increase in investment,
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Change in investment
Ex. ὰ1 = 750 – 500 there is a corresponding 5 peso increase in
100 – 50 equilibrium income.
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Alternative Formula: ὰ1 = 1/(1-mpc)

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Saving Function
ὰ1 = 5 Equation: S = -C +(1- mpc)*Y
Consumption Function
Equation: C = C + mpc*Y Where: C = consumption function
Where: C = consumption function -C = autonomous consumption (fixed)
C = autonomous consumption (fixed) (1-mpc)or mps = marginal propensity to save
mpc = marginal propensity to consume Y = variable
Y = variable (1-mpc)*Y = how savings responds to a
Mpc*Y = how consumption spending change in income
responds to a change in income
Note: MPS+MPC = 1

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 ECO 007: Economic Development
Module #6 Student Activity Sheets

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

Based on the previous tables, we will construct the consumption function and savings function.

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Consumption Function Savings Function

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C = C + mpc*Y S =- C +(1- mpc*Y)
C = 50 + 0.80Y S = -50 + (1-0.80) Y

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S = -50 + 0.20Y

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2) Activity 3: Skill-Building Activities (30 min)
Let’s apply what you have learned on our discussion.

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Part 1 (20 min)
Direction: Complete the following table and answer the following questions.
Y C I S AE

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1. What is the equilibrium level of income?
0 100 100
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100 175 100 2. What is the value of marginal propensity to
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200 250 100 consume?
300 325 100
3. What is the relationship of income (Y) and
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400 400 100 aggregate expenditure (AE)? Is it positive or directly

500 475 100 proportional, negative or inverse or not related to each
600 550 100 other?
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700 625 100

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4. Suppose that investment spending in question # 1

800 700 100 doubles. What will be the new equilibrium income?
900 775 100
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1000 850 100 5. What is the investment multiplier? Interpret your

1100 925 100 answer.
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1200 1000 100

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1300 1075 100

1400 1150 100
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Part 2 (10 min)

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For this activity, I want you to give your insights or ideas in relation to John Maynard Keynes, “The
Paradox of Thrift”. It is the phenomenon of lower output due to higher savings. It is often argued that
higher savings lead to higher income but according to Keynes’ paradox of thrift, it is the opposite.

Question #1: As a student, what do you think is the importance of savings?

Question#2: In relation to paradox of thrift, is savings good or bad for the economy? Explain you side.

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 ECO 007: Economic Development
Module #6 Student Activity Sheets

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

3) Activity 4: Check for Understanding (8min)

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1. Consider an economy with no government, imports, or exports, and with fixed prices and interest
rates. Let C = 150 + 0.60Y and I = 50.

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a. Determine the equilibrium level of income.

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b. Determine the marginal propensity to consume (MPC) and marginal propensity to save (MPS).
c. What is the value of the investment multiplier.

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2. Consider an economy with an autonomous consumption = 100 and marginal propensity to

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consume=0.75.

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a. Determine the consumption function of the economy.
b. Determine the savings function of the economy.

C. LESSON WRAP-UP
1) Activity 5: Thinking about Learning (5 min) A
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A. Work Tracker
You are done with this session! Let’s track your progress. Shade the session number you just
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completed.
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B. Think about your Learning

1. Good job! I hope you learned a lot today! Can you share your learning experience on today’s activity?
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What topic do you think is the most challenging to understand but at the end you were able to comprehend
and appreciate?
__________________________________________________________________________________
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KEY TO CORRECTIONS
Skill Building Activity Part 1
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Y C I S AE
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0 100 100 -100 200

100 175 100 -75 275
200 250 100 -50 350
300 325 100 -25 425
400 400 100 0 500
500 475 100 25 575
600 550 100 50 650
700 625 100 75 725
800 700 100 100 800

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 ECO 007: Economic Development
Module #6 Student Activity Sheets

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

900 775 100 125 875 1. 800

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1000 850 100 150 950
2. MPC = 175 – 100 MPC = 0.75

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1100 925 100 175 1025
100 - 0
1200 1000 100 200 1100

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1300 1075 100 225 1175 3. There is a positive relationship between aggregate
1400 1150 100 250 1250 expenditure and income.

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4. 1200

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5. Investment multiplier = change in equilibrium income

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change in investment
= 400/100
=4

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Investment multiplier of 4 implies that for every 1peso increase in investment, there is a corresponding 4 peso
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increase in equilibrium income.
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Part 2. (Suggested Answer)

People save for various reasons. Some save with a specific purchase in mind, such as cosmetic surgery or a
Porsche, while others save just to have more money. Economists say that individuals save to buy durable goods
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and/or accumulate wealth to maintain a certain lifestyle during retirement or in times of financial uncertainty.
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These reasons all confer benefits to a saver. In the near term, the saver can finally buy the latest and greatest
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gadget, and in the long term, the saver can be more financially secure during retirement or unplanned
unemployment.
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John Maynard Keynes, who published his influential work, The General Theory of Employment, Interest, and
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Money, in 1936, noted saving can ultimately be harmful to the economy because of the paradox of thrift. This
theory argues that if everyone individually cuts spending to increase saving, aggregate saving will eventually fall
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because one person's spending is someone else's income. Because increased saving, by definition, decreases
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current consumption, it stifles demand.

Activity 4: Check for Understanding

1.
a. Equilibrium output occurs where aggregate expenditure (C + I) equals
aggregate output (Y). That is,
C+I=Y
⇒ (150 + 0.6Y) + 50 = Y
⇒ 200 + 0.6Y = Y
⇒ 200 = 0.4Y
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 ECO 007: Economic Development
Module #6 Student Activity Sheets

Name: Class number: _______

_________________________________________________________________ Date:_______________
Section: ____________ Schedule:_____________________________________

⇒ 500 = Y

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Therefore equilibrium output equals 500.

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b. MPC = 0.60 (already given in the equation); MPS = 0. 40 ( 1-0.60)

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c. Investment multiplier = 1/ (1-mpc)
= 1/(1-0.60)
= 2.50

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2.
a. Equation: C = C + mpc*Y

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C = 100 + 0.75 Y

b. Equation: S =- C + (1-mpc)*Y
S = -100 +(1-0.75)*Y
S = -100 + 0.25 Y A
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