Question

Suppose the initial conditions of the economy are characterized by the following equations in black font. We then shock the economy as shown in italics.

1) C = a0 + a1 (Y-T) + a2 (WSM) + a3 (WRE) + a4 (CC) + a5 (r)

1’) C = a0 + a1 (Y-200) + a2 (10,000) + a3 (15,000) + a4 (120) + a5 (3)

1’') C = a0 + a1 (Y-200) + a2 (12,000) + a3 (15,000) + a4 (160) + a5 (3)

2) I = b0 + b1AS + b2CF + b3 (r)

2’) I = b0 + b1 (140) + b2 (1500) + b3 (3)

2’) I = b0 + b1 (180) + b2 (2000) + b3 (3)

3) G = G

3’) G = 200

4) X-M = X-M

4’) X-M = -200

4’) X-M = -400

5) AE = C + I + G + X-M

Where: a0 = 50, a1 = .80, a2 = .05, a3 = .10, a4 = .5, a5 = -400, b0 = 100, b1 = .5, b2 = .2, b3 = -50 Use the initial conditions above to get expressions for the Consumption function, Investment and the AE equation. Fill in the intercept and slope values to correctly complete the consumption function:

1. C = _____ +______ Y

2. What is the value of Investment: I = ________

3. Fill in the intercept and slope values to correctly complete the AE equation: AE =____ +____ Y

4. The value of equilibrium output (Y) = _______

5. The value of equilibrium consumption (C) = ______

We now incur shocks to the economy as provided above in the italic font. Use these new conditions to get expressions for the Consumption function, Investment and the AE equation.

Fill in the intercept and slope values to correctly complete the new consumption function:

1. C = __ + _____ Y

2. What is the new value of Investment: I = ______

3. ill in the intercept and slope values to correctly complete the new AE equation: AE = ____ +________ Y

4.The new value of equilibrium output (Y) = ______

5.The new value of equilibrium consumption (C) = _______

1. Graph the AE equation both before and after the shock on one graph, and also plot equilibrium output Y both before and after the shock.

Are your results above consistent with the new economy?

Group of answer choices

Yes, wealth in the stock market, consumer confidence, cash flow and the trade deficit all increased and animal spirits are positive. This is consistent with the new economy.

No, wealth in the stock market, consumer confidence, cash flow and the trade deficit all increased and animal spirits are positive. This is not consistent with the new economy.

Answer 1