Reference no: EM131928992
Suppose the initial conditions of the economy are characterized by the following equations. In this problem, we assume that prices are fixed at 1 (the price index is 100 and when we deflate, we use 1.00) so that nominal wealth equals real wealth.
1) C = a0 + a1 (Y-T) + a2 (WSM) + a3 (WRE) + a4 (CC) + a5 (r)
1') C = a0 + a1 (Y-200) + a2 (10,000) + a3 (15,000) + a4 (100) + a5 (3)
2) I = b0 + b1AS + b2CF + b3 (r)
2') I = b0 + b1 (160) + b2 (1800) + b3 (3)
3) G = G
3') G = 400
4) X-M = X-M
4') X-M = -200
Where: a0 = 200, a1 = .80, a2 = .05, a3 = .10, a4 = .8, a5 = -500, b0 = 300, b1 = .5, b2 = .5, b3 = -200
Derive an expression for the consumption function and graph it on your exam sheet. Show all work.