Assignment:
1. Consumption) Use the following data to answer the following questions.
Real Disposable income (billions) Expenditures (billions) Savings (billions)
$100 $150
$200 $200
$300 $250
$400 $300
a. Graph the consumption function, with consumption spending on the vertical axis and disposable income on the horizontal axis.
b. If the consumption function is a straight line, what is its slope?
c. Fill in the saving column at ach level of income. If the saving function is straight line, what is its slope?
2. Consumption Function: How would an increase in each of the following affect the consumption function?
a. Net taxes
b. The interest rate
c. Consumer optimism, or confidence
d. The price level
e. Consumers' net wealth
f. Disposable income
3. (Simple Spending Multiplier) For each of the following values for the MPC, determine the size of the simple spending multiplier and the total change in real GDP demanded following a $10 billion decrease in spending:
a. MPC= 0.9
b. MPC= 0.75
c. MPC= 0.6
4. (Expansionary and Recessionary Gaps)
a. If the actual price level exceeds the expected price level reflected in long-terms contracts, real GDP equals -------- and the actual price levels equals ------- in the short run.
b. The situation described in part (a) results in a -------- gap equal to -----.
c. If the actual price level is lower than the expected price level reflected in long-term contracts, real GDP equals ------ and the actual price level equals ------ in the short run.
d. The situation described in part (c) results in a ------ gap equal to -------.
e. If the actual price level equals the expected price level reflected in long-term contracts, real GDP equals ------ and the actual price level equals ------- in the short run.
f. The situation described in part (e) results in ------- gap equal to --------.
5. (Changes in Aggregate Supply) List three factors that can change the economy's potential output. What is the impact of shifts of the aggregate demand curve on potential output? Illustrate with a diagram.
6. (Supply Shocks) Give an example of an adverse supply shock and illustrate graphically. Do the same for a beneficial supply shock.