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ECON 104 HOMEWORK #1 (75 points total)
1.(40 points total – 5 points each part, 10 points for correct and completely labeled diagram) Suppose the consumption function is as follows:C = a1Yd+ a2WRE/S + aWhere all the a’s (the sensitivity parameters) are greater than zero.Initial conditions: Let a1= 0.60, a2= 0.04,a3= .5, WRE/S = 18,000: CC = 901.a) Solve for C in terms of Ydand graph the consumption function.2000.b) Let Yd= 2000…. solve for the level of consumption and label as point A on your diagram.
3
CC
100.
c) Now suppose disposable income falls due to a tax increase (Uncle Sam is trying to balance the budget) to 1800 but at the same time, the stock

market rallies so that WRE/S rises to 22,000 and along with it, consumer confidence (CC) rises to 100. Re-solve for C in terms of Yd.1.d) Solve for the level of consumption given the change in part c) and add to your diagram as point B.1.e) Now show as point C, the level of consumption that would have occurredif Uncle Sam did not raise taxes (we still had the same change WRE/S and CC as in part c)).1.f) What is the percent change in consumption from points A to B?2.(30 points – 10 points each part) In this problem, we are going to obtain data on consumption and disposable income from the Federal Reserve.Go to FRED(Federal Reserve Economic Data) and search for PCECC96 (real personal consumption expenditures – this is consumption)Record the level of consumption the quarter that you were born as well recording the most recent data on consumption.Search FRED again for DPIC96 (real disposable personal income – this is disposable income (Yd))Record the level of disposable income the quarter you were born as well as the most recent data on disposable income. Please answer the following questions.