ECON 2313Exercise 3, Part 1

1 and 2 are based on the following table:

YD (billions) C (billions)

0 700

1,000 1,550

3,000 3,250

6,000 5,800

9,000 8,350

12,000 10,900

15,000 13,450

1. What is the intercept (a) of the consumption function?

2. What is the slope of the consumption function (b) or the MPC?

3. Use the numbers you have reported in (1) and (2) above to compute consumption expenditure when YD = $4,666.66 billion

4. Suppose that, other things being equal, net taxes (T) increase by $40 billion. What is the predicted change in consumption? Be sure to indicate whether positive or negative.

5. Graph the consumption function using Figure 1.

C (billions)

YD (billions)

0

Figure 1

Part 2

Use the following set up to answer questions 1 through 5:

AE = C + IP + G + NX

C = 600 + .75YD

IP = 600G = 700NX = -50T = 400

1. What is the value of the multiplier?

2. Write the equation for the aggregate expenditure (AE) function.

3. Compute the equilibrium value of real GDP and illustrate using Figure 2.

4. Assume the economy is in equilibrium as you computed in (3) above. Suppose that, other things being equal, planned investment increases (IP) by $50. Compute the resulting change in consumption (C).

5. Based on the figures above, compute unplanned inventory investment when GDP is equal to $6,500.

450

Real GDP(billions)

AE(billions)

Figure 2

ECON 2313Spring Semester, 2002Exercise 3, Part 3

What follows is a series of panels (a through e). In each case the economy is in equilibrium at point . You are to illustrate the effects of the change described in each panel. This will entail drawing a new AE function that has shifted in one direction or another and labeling the new point of equilibrium (intersection of AE and the 450 line) AND new equilibrium level of GDP.

450

Real GDP(billions)

AE(billions)

AE1

Panel AIncrease in government expenditure, ceteris paribus

Y1

450

Real GDP(billions)

AE(billions)

AE1

Panel BDecrease in interest rates, ceteris paribus

Y1

450

Real GDP(billions)

AE(billions)

AE1

Panel CStock market crash, ceteris paribus

Y1

450

Real GDP(billions)

AE(billions)

AE1

Panel DIncrease in net taxes, ceteris paribus

Y1

450

Real GDP(billions)

AE(billions)

AE1

Panel EIncrease in exports, ceteris paribus

Y1