Problem 1: (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
Problem 2: (Simple spending multiplier) For each of the following values for MPC, determine the size of the simple spending multiplier and the total change in real GDP demanded following a 10 billion dollar decrease in spending:
a. =.09
b. =.075
c. =00.6
Problem 3: (Changes in aggregate supply) List 3 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.
Problem 4: (supply shocks) Give an example of an adverse supply shock and illustrate graphically. Now do the same for beneficial supply shock.