Draw a consumption function and explain its intercept and slope. Show the impact of an increase in wealth on the consumption function, then show the corresponding impact on aggregate supply, aggregate demand, equilibrium real GDP and the price level. Explain all of these impacts in words.
2. Describe and explain the slopes of the aggregate demand curve and the aggregate supply curve. Draw the curves and show what happens to production and prices in each of the following scenarios.
Scenario 1: Technology improves productivity.
Scenario 2: The government pursues a macroeconomic policy of fiscal restraint.
Scenario 3: The financial system collapses and investors become very pessimistic. Then the government passes huge stimulus programs to get the economy going again.
3. Assume that C = 500 + 0.8YD where C is consumption and YD is disposable income. If YD = $1000B, what is the average propensity to consume, the average propensity to save, the marginal propensity to consume, the marginal propensity to save, the spending multiplier, the tax multiplier and the balanced budget multiplier? How much would the government need to increase spending to eliminate an aggregate demand shortfall of $1000B? How much would it need to cut taxes to achieve the same result? Explain why your two answers are different.
4. Distinguish between the federal budget deficit and the national debt. List and evaluate three common fears about the national debt. Explain the distinction between growth and austerity strategies to reduce the national debt.
5. Consider the following macroeconomic data from 2014 (in billions of current dollars):
>Disposable income = $12,970
>Consumption = $11,866
>Planned investment = $2234
>Government outlays = $3506
>Government tax revenues $3021
>Exports = $2342
>Imports = $2872
(a) Savings =
(b) Financial sector leakage or injection (indicate which) =
(c) Government sector leakage or injection (indicate which) =
(d) Foreign sector leakage or injection (indicate which) =
(e) Total leakages =
(f) Total injections =
(g) Would you predict that the US economy in 2015 will be larger or smaller than it was in 2014? Explain.
2. Describe and explain the slopes of the aggregate demand curve and the aggregate supply curve. Draw the curves and show what happens to production and prices in each of the following scenarios.
Scenario 1: Technology improves productivity.
Scenario 2: The government pursues a macroeconomic policy of fiscal restraint.
Scenario 3: The financial system collapses and investors become very pessimistic. Then the government passes huge stimulus programs to get the economy going again.
3. Assume that C = 500 + 0.8YD where C is consumption and YD is disposable income. If YD = $1000B, what is the average propensity to consume, the average propensity to save, the marginal propensity to consume, the marginal propensity to save, the spending multiplier, the tax multiplier and the balanced budget multiplier? How much would the government need to increase spending to eliminate an aggregate demand shortfall of $1000B? How much would it need to cut taxes to achieve the same result? Explain why your two answers are different.
4. Distinguish between the federal budget deficit and the national debt. List and evaluate three common fears about the national debt. Explain the distinction between growth and austerity strategies to reduce the national debt.
5. Consider the following macroeconomic data from 2014 (in billions of current dollars):
>Disposable income = $12,970
>Consumption = $11,866
>Planned investment = $2234
>Government outlays = $3506
>Government tax revenues $3021
>Exports = $2342
>Imports = $2872
(a) Savings =
(b) Financial sector leakage or injection (indicate which) =
(c) Government sector leakage or injection (indicate which) =
(d) Foreign sector leakage or injection (indicate which) =
(e) Total leakages =
(f) Total injections =
(g) Would you predict that the US economy in 2015 will be larger or smaller than it was in 2014? Explain.
