Draw an aggregate expenditure line and 45-degree line for an imaginary economy that produces only services. Label the axes “Real GDP per day” and “Aggregate expenditure per day.” Remember that with services, there can be no inventories.
a. Assume that on day 1, the economy is in equilibrium, with total income and total spending on services both equal to $10 billion per day. Label this equilibrium (where the two lines in your diagram intersect) “E.”
b. Suppose that on the morning of Day 2, people want to save more than before. Show the shift in the aggregate expenditure line. (Make the shift a large one.)
c. On day 2, each service worker goes to work believing his or her income will be the same as on day 1, but buying less in services that day. On your new aggregate expenditure line, label total spending on day 2 “H.”
d. On day 2, because fewer services are sold, fewer are produced, and actual income is lower than people expected it to be. On your 45 degree line, label total income on day 2 “K.”

e. On day 3, each service worker goes to work believing his or her income will be the same as on day 2. On your aggregate expenditure line, label total spending on day 3 “L.”
f. If the economy continues adjusting this way for several more days, where will it end up? Label the economy’s final equilibrium point “J.” Is the new equilibrium GDP the same as it would be if the economy produced only goods?