What are the determinants of consumption function

Question

Assignment:

Consider an economy with the following equations and relationships:

Z= C^D + I^D + G

C^D= C₀+C₁ Yd

Yd= Y-T

I^D= b₀ + b₁Y - b₂i

G = G¯

T = t₀+t₁Y Note: There are two components i= i^T this is an interest rate target

M^D/P = K₀ + K₁ Y-k₂ⁱ

c₀ = 200  c₁= 0.6

b₀ = 300  b₁ = 0.1

b₂ = 3     k₀ = 30

k₁ = 0.5   k₂ = 5

t₀ = 100   t₁ = 0.2

i^T= 4       G¯= 500 P= 1.0

Note: There ore two differences in the notation from the lecture notes. First the order of the coefficients for in the behavioral equation for investment demand is changed. The coefficient for the interest sensitivity is b2 and the coefficient of the current income response is b1. Second the behavioral demand equation for reed balances has been linearized into three components.

a) What are the determinants of consumption function? Explain their impact?

b) What is the expenditure multiplier? Explain the components and their impact on the multiplier.

c) What is the equilibrium level of outputtincome, disposable income, consumption, savings, and the budget deficit or surplus?

d) Write out and explain the expression for real money balances intuitively.

e) What is the level nominal Money supply needed to meet the interest rate target?

f) Solve for the equilibrium in the 1S-LM model above. Illustrate the IS-LM equilibrium in a graph.

g) What is the IS curve? What is the slope of the IS curve?