Question

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 - 200) + a2 (10,000) + a3 (15,000) + a4 (100) + a5 (3)

2) I = b0 + b1 AS + b2 CF + b3 (r)

2’) I = b0 + b1 (150) + b2 (2000) + b3 (3)

3) G = G

3’) G = 300

4) X - M = X - M

4’) X - M = - 100

Where: a0 = 165 , a1 = .75, a2 = .05, a3 = .10, a4 = .8, a5 = - 500, b0 = 210, b1 = .5, b2 = .5, b3 = - 200

Derive an expression for the consumption function and graph it on your exam sheet. Show all work.

Answer 1