# Exam 2 Answer Key.doc - Points Awarded Points Missed 107.0...

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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 View full document
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 View full document
3. Why is a3larger than a2 ?
PointsEarned: 0.0/5.0 View full document
4. Derive an expression for the aggregate expenditure curve and graph it on your exam sheet labeling this initial equilibrium output as point A. Also, add this point A to your consumption function. Show all work. Draw an aggregate demand and an aggregate supply curve in the right hand graph on your exam sheet identifying this initial point as point A. NOTE: We are holding the price level fixed at 100 in this problem. Also, note that you that you cannot derive an expression for the aggregate demand curve, just draw it with a negative slope going through point A. View full document  ## Want to read all 7 pages?

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