04 Jun Question HOMEWORK #6 (100 points total) Part 1: AE problem 60 Points total
Question
HOMEWORK #6 (100 points total)
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.
Part 2: True / False Questions (2 points each – 40 points total) Answer T for True and F for False
1) Consumption is positively related to stock market wealth but negatively related to taxes and tax
rates.
2) If aggregate expenditures rise unexpectedly, then inventories will also rise unexpectedly.
3) Services are the most interest rate sensitive component of consumption.
4) Investment is the most cyclical component of aggregate expenditures.
5) The ‘job-loss’ recovery occurred following the 2001 recession.
6) Negative real interest rates imply that if you save today, you can purchase a smaller basket of
goods and services in the future, relative to the basket you could have consumed today.
7) The higher the marginal propensity to consume the more powerful tax policy is to influencing
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