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ECON 2313
Exercise 3, Part 1
1 and 2 are based on the following table:
YD (billions) C (billions)
0
700
1,000
1,550
3,000
3,250
6,000
9,000
5,800
8,350
12,000
10,900
15,000
13,450
1. What is the intercept (a) of the consumption
function?
2. What is the slope of the consumption function
(b) or the MPC?
3. Use the numbers you have reported in (1) and
(2) above to compute consumption expenditure
when YD = $4,666.66 billion
4. Suppose that, other things being equal, net taxes
(T) increase by $40 billion. What is the
predicted change in consumption? Be sure to
indicate whether positive or negative.
5. Graph the consumption function using Figure 1.
Figure 1
C (billions)
0
YD
(billions)
Part 2
Use the following set up to answer questions 1
through 5:
AE = C + IP + G + NX
C = 600 + .75YD
IP = 600
G = 700
NX = -50
T = 400
1. What is the value of the multiplier?
2. Write the equation for the aggregate expenditure (AE) function.
3. Compute the equilibrium value of real GDP and illustrate using
Figure 2.
4. Assume the economy is in equilibrium as you computed in (3)
above. Suppose that, other things being equal, planned
investment increases (IP) by $50. Compute the resulting change
in consumption (C).
5. Based on the figures above, compute unplanned inventory
investment when GDP is equal to $6,500.
AE
(billions)
Figure 2
450
Real GDP
(billions)
ECON 2313
Spring Semester, 2002
Exercise 3, Part 3
What follows is a series of panels (a through e). In
each case the economy is in equilibrium at point . You
are to illustrate the effects of the change described in
each panel. This will entail drawing a new AE function
that has shifted in one direction or another and labeling
the new point of equilibrium (intersection of AE and the
450 line) AND new equilibrium level of GDP.
Increase in government expenditure,
AE
(billions) ceteris paribus
Panel A
AE1

450
Y1
Real GDP
(billions)
AE
(billions)
Decrease in interest rates,
ceteris paribus
Panel B
AE1

450
Y1
Real GDP
(billions)
AE
(billions)
Stock market crash, ceteris
paribus
Panel C
AE1

450
Y1
Real GDP
(billions)
AE
(billions)
Increase in net taxes,
ceteris paribus
Panel D
AE1

450
Y1
Real GDP
(billions)
AE
(billions)
Increase in exports, ceteris
paribus
Panel E
AE1

450
Y1
Real GDP
(billions)