ECON 2313 Exercise 3, Part 1 1 and 2 are based on the following table: Y D (billions)C (billions) 0700 1,0001,550 3,0003,250 6,0005,800 9,0008,350 12,00010,900.

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ECON 2313 Exercise 3, Part 1 1 and 2 are based on the following table: Y D (billions)C (billions) ,0001,550 3,0003,250 6,0005,800 9,0008,350 12,00010,900 15,00013,450

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 Y D = $4, 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) Y D (billions) 0 Figure 1

Part 2 Use the following set up to answer questions 1 through 5: AE = C + I P + G + NX C = Y D I P = 600 G = 700 NX = -50 T = 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 (I P ) 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.

45 0 Real GDP (billions) AE (billions) Figure 2

ECON 2313 Spring Semester, 2002 Exercise 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 45 0 line) AND new equilibrium level of GDP.

45 0 Real GDP (billions) AE (billions)  AE 1 Panel AIncrease in government expenditure, ceteris paribus Y1Y1

45 0 Real GDP (billions) AE (billions)  AE 1 Panel B Decrease in interest rates, ceteris paribus Y1Y1

45 0 Real GDP (billions) AE (billions)  AE 1 Panel C Stock market crash, ceteris paribus Y1Y1

45 0 Real GDP (billions) AE (billions)  AE 1 Panel D Increase in net taxes, ceteris paribus Y1Y1

45 0 Real GDP (billions) AE (billions)  AE 1 Panel E Increase in exports, ceteris paribus Y1Y1