ECON 2313 Exercise 2, Part 1

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ECON 2313Exercise 2, Part 1
1 and 2 are based on the following table
2

• What is the intercept (a) of the consumption
  function?
• What is the slope of the consumption function (b)
  or the MPC?
• Use the numbers you have reported in (1) and (2)
  above to compute consumption expenditure when YD
  4,666.66 billion
• 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.
• Graph the consumption function using Figure 1.

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Figure 1
C (billions)
0
YD (billions)
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Part 2
Use the following set up to answer questions 1
through 5
AE C IP G NX C 600 .75YDIP 600G
700NX -50T 400
5

• What is the value of the multiplier?
• Write the equation for the aggregate expenditure
  (AE) function.
• Compute the equilibrium value of real GDP and
  illustrate using Figure 2.
• 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).
• Based on the figures above, compute unplanned
  inventory investment when GDP is equal to 6,500.

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AE(billions)
Figure 2
450
Real GDP(billions)
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ECON 2313Spring Semester, 2006Exercise 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.
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Panel A
Increase in government expenditure, ceteris
paribus
AE(billions)
AE1
?
450
Y1
Real GDP(billions)
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Decrease in interest rates, ceteris paribus
Panel B
AE(billions)
AE1
?
450
Y1
Real GDP(billions)
10
Stock market crash, ceteris paribus
Panel C
AE(billions)
AE1
?
450
Y1
Real GDP(billions)
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Increase in net taxes, ceteris paribus
Panel D
AE(billions)
AE1
?
450
Y1
Real GDP(billions)
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Increase in exports, ceteris paribus
Panel E
AE(billions)
AE1
?
450
Y1
Real GDP(billions)