In a small rural town, 150 people would like to be employed (this is the supply of labor). In order to make profits, capitalists hire some of these workers to produce grain. Those who are not hired producing grain are unemployed. Each employed worker produces 4 bushels of grain per year. The price of a bushel is $1. Workers are paid a wage of $2 per year. The workers, being quite poor, spend all their wages buying grain to eat. The capitalists, however, spend only half their profits on their consumption. There is no trade with other countries.
To begin with we will ignore the government, so that there are no taxes and government spending. In this case, aggregate demand will depend on the above information and how much the capitalists decide to invest. If they invest $100, and if 125 workers are employed, rather than all the 150 people.
How many bushels will be produced? __________________
What will be the aggregate supply in dollars? $___________________
What will be the demand for consumer goods
(a) By workers? (Hint: their consumption as wages) $________________________
(b) By capitalists? (Hint: their consumption) $__________________________
What is the total amount of savings? (Hint: half of profits) $___________
What is the investment shortfall (savings minus investment)? $___________
What will aggregate demand be? $____________________
Will aggregate demand equal aggregate supply? ________________
Would you expect capitalists to continue to hire the same number, more or fewer
workers? ____________________________________________
An unemployment equilibrium occurs. If instead of 125 workers, only 100 are employed, and investment remains at $100,
How many bushels will be produced? ____________________
What will be the aggregate supply in dollars? $____________________
What will be the demand for consumer goods
(a) By workers? $_____________
(b) By capitalists? $____________
What is the total amount of savings? $___________________
What is the investment shortfall (savings minus investment)? $__________
What is the sum of C + I?
Will aggregate demand equal aggregate supply? ______________________
Would you expect capitalists to continue to hire the same number, more or fewer
workers? Why or Why not? (use actual numbers in calculating the level employment).