Points Awarded 107.0 0 Points Missed23.00 Percentage82.3% 1. Suppose the initial conditions of the economy are characterized by the following equations. In this problem, we assume that prices are fixed at 1 (the price index is 100 and when we deflate, we use 1.00) so that nominal wealth equals real wealth. 1) C = a0+ a1(Y-T) + a2(WSM) + a3(WRE) + a4(CC) + a5 (r) 1’) C = a0+ a1(Y-500) + a2(10,000) + a3(15,000) + a4(100) + a5 (2) 2) I = b0+ b1AS + b2CF + b3 (r) 2’) I = b0+ b1(200) + b2(2400) + b3 (2) 3) G = G 3’) G = 700 4) X-M = X-M 4’) X-M = -300 Where: a0= 100, a1= .90, a2= .04, a3= .08, a4= .8, a5= -100, b0= 500, b1= .5, b2= .5, b3 = -100 Derive an expression for the consumption function and graph it on your exam sheet. Show all work. Points Earned:5.0/5.0

2. Interpret a2and a3(i.e., what do they measure) and why are they so important in terms of measuring the impact of the Great Recession on consumption. PointsEarned: 5.0/5.0

3. Why is a3larger than a2 ?