Consider an economy like the U.S., only with all planned spending categories in round numbers:
- C--consumption spending on domestically-produced goods--$9 trillion/year
- I--business investment spending--$2 trillion/year
- G--government purchases--$2 trillion/year
- X--exports of goods and services--$2 trillion/year
Y--total projected income--$15 trillion/year
What is total planned spending E in this economy this year?
Suppose irrational exuberance pushes business investment spending up to $3 trillion/year this year as businesses decide they can spend down their cash reserves. What do you expect to happen?
￼3. Suppose irrational pessimism pushes business investment spending down to $1 trillion/year this year as businesses decide they need to cut back and build up their cash reserves. What do you expect to happen?