03 Jun Question Part 1: AE problem 60 Points total
Question
Part 1: AE problem 60 Points total
Suppose the initial conditions of the economy are characterized by the following equations in
black font. We then shock the economy as shown in the red font.
1) C = a0 + a1 (Y-T) + a2 (WSM) + a3 (WRE) + a4 (CC) + a5 (r)
1) C = a0 + a1 (Y-200) + a2 (10,000) + a3 (15,000) + a4 (120) + a5 (4)
1′) C = a0 + a1 (Y-200) + a2 (12,000) + a3 (15,000) + a4 (160) + a5 (4)
2) I = b0 + b1AS + b2CF + b3 (r)
2) I = b0 + b1 (140) + b2 (1500) + b3 (4)
2) I = b0 + b1 (180) + b2 (2000) + b3 (4)
3) G = G
3) G = 200
4) X-M = X-M
4) X-M = -200
4) X-M = -400
5) AE = C + I + G + X-M
Where: a0 = 50, a1 = .60, a2 = .05, a3 = .10, a4 = .5, a5 = -400, b0 = 100, b1 = .5, b2 = .2, b3 = -50
a) (20 points total 5 points for expression and 15 points for correct and completely labeled
diagram). Given the initial conditions, find expression for consumption function and
provide a completely labeled diagram. Please show all work.
b) (20 points total 5 points for expression and 15 points for correct and completely labeled
diagram). Given the initial conditions, find an expression for the aggregate expenditure
curve (AE in terms of Y), solve for equilibrium output and provide a graph of this
aggregate expenditure curve labeling this initial equilibrium as point A. Please add point
A to your consumption function diagram, being sure to label this point completely. Please
show all work.
c) (10 points) We now incur shocks as provided in red font. Solve for a new expression of
the consumption function and aggregate expenditure curve, solve for the new equilibrium
output and add this new equilibrium point to both of your diagrams (label as point B).
Please show all work.
d) (10 points) Are your results consistent with the new economy? Why or why not? Explain
in detail.
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