Assume the following parameters for a closed economy:

C = 150 + .8(YD) I = 500 G = 500 T = 450 Full-employment Y = 4000 Equilibrium income is at 3,950$, and consumption spending is at 2,950$.

f. Now, assume that investment spending falls by 20. First, show the decline in I on a diagram adding the new (lower) aggregate expenditure line.

g. Next, due to the decline in I, you want to examine "unintended inventory change." To do so,

answer these questions:

i.

At the initial level of equilibrium Y AND this new lower AE, compare Y to AE. That is,

what is the amount of Y and what is the amount of AE?

ii.

The difference between Y and AE (that you just showed above) is the amount of unintended

inventory change: Are inventories increasing or decreasing?

h. Given the unintended change in inventories, how do we expect producers will respond?

Specifically, what will be the first, initial change in production and Y? Note: in parts h-j, you are

showing how the multiplier process gets going, the start of the process: NOT the final outcome of

the multiplier.