econ101fall11exam1practiceb

# econ101fall11exam1practiceb - 180.101 Principles of...

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180.101 Principles of Macroeconomics, Fall 2011 First Term Exam : Practice Problems Question 1 . Suppose you have the following consumption function C = α + βY + γZ where α > 0 is a constant, 0 < β < 1, γ < 0, Z is some variable that affects consumption and Y is income. (a) Explain the economic meaning of α , β , and γ . (b) Plot C against Y . Describe the intercept and the slope. (c) Explain what will happen to the consumption curve if Y increases. Show your answer graphically. (d) Explain what will happen to the consumption curve if Z decreases. Show your answer graphically. (e) Suppose by using the above formula we calculated consumption in 2009 to be 100 and 150 in 2011. Calculate the growth rate of consumption between 2009 and 2011. (f) Explain what it means for the economy to be in recession. Explain what it means for the economy to be expansion. Do you have enough information to establish whether the economy is in recession or expansion from your answer to part (e)? What other information would you need to figure this out? (g) Suppose Z = P , meaning Z reflects prices. How do changes in price affect consumption?

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