An Arithmetic Analysis

An arithmetic example may help show why the equilibrium level of output occurs where planned spending and planned output are equal. Table 24-1 on p. 496 shows a simple example of consumption and saving functions The break-even level of income, where the nation is too poor ‘to’do any net saving on balance, is assumed to be $3000 billion ($3 trillion). Each change of income of $300 billion is assumed to lead to a $100 billion change
in saving and a $200 billion change in consumption in other words, for simplicity MPC is assumed to be constant and exactly equal to %” Therefore, MPS = 1

Again, we assume that investment is exogenous. Suppose that the only level of investment that will be sustained indefinitely is exactly $200 billion, as shown in column, (4) of Table 24-1. That is are each level of GDP, businesses desire to purchase $200 billion of investment goods, no more and no less.

we see, then, that when business firms as a whole are temporarily producing more than they can profitably sell, they will contract their operations. and GDP will fall. they an” selling more than their current production, they will increase their put and GDP will rise.

Only when the level 01 initial output in column (1) exactly equals planned in column (2) will business firms be in equilibrium. Their sales will then be just enough to justify continuing their current level of aggregate output. GDP will neither expand nor contract.

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