ECON 104 Homework 4 Answer (Penn State University)

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Submitted by Drummond, Craig (CHD5082) on 3/4/2017 11:44:18 PM Points Awarded 77.00 Points Missed 23.00 Percentage 77.0% 1. Part 1: AE Problem (11 questions worth 3 points each for a total of 33 points). Suppose the initial conditions of the economy are characterized by the following equations in black font. We then shock the economy as shown in the red font. 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 (4) 1’') C = a0 + a1 (Y-200) + a2 (12,000) + a3 (15,000) + a4 (160) + a5 (4) 2) I = b0 + b1AS + b2CF + b3 (r) 2’) I = b0 + b1 (140) + b2 (1500) + b3 (4) 2’) I = b0 + b1 (180) + b2 (2000) + b3 (4) 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 = .60, 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: C = + Y Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): Box 1: 390; Box 2: .6, 0.6, 0.60, .60 2. What is the value of Investment: I = Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): 270 3. Fill in the intercept and slope values to correctly complete the AE equation: AE = + Y Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): Box 1: 660; Box 2: .6, .60, 0.6, 0.60 4. The value of equilibrium output (Y) = Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): 1650 5. The value of equilibrium consumption (C) = Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): 1380 6. We now incur shocks to the economy as provided in the red 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: C = + Y Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): Box 1: 510; Box 2: .6, .60, 0.6, 0.60 7. What is the new value of Investment: I = Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): 390 8. Fill in the intercept and slope values to correctly complete the new AE equation: AE = + Y Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): Box 1: 700; Box 2: .6, .60, 0.6, 0.60 9. The new value of equilibrium output (Y) = Table for Individual Question Feedback Points Earned: 3.0/3.0 Correct Answer(s): 1750 10. The new value of equilibrium consumption (C) = Feedback: NOTE: There is no graphing component to be collected for this homework. However, you should be comfortable creating two separate graphs from the above questions in part 1. You should be able to: 1.Graph the consumption function both before and after the shock on one graph, and also plot equilibrium consumption and output values both before and after the shock. 2.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.

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