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ECON 104 HOMEWORK 6 Assignment Solution............

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Question;Part 1: AE problem 60 Points totalSuppose the initial conditions of the economy are characterized by the following equations inblack font. We then shock the economy as shown in the red font.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 (120) + a5 (4)1') C = a0 + a1 (Y-200) + a2 (12,000) + a3 (15,000) + a4 (160) + a5 (4)2) I = b0 + b1AS + b2CF + b3 (r)2) I = b0 + b1 (140) + b2 (1500) + b3 (4)2) I = b0 + b1 (180) + b2 (2000) + b3 (4)3) G = G3) G = 2004) X-M = X-M4) X-M = -2004) X-M = -4005) AE = C + I + G + X-MWhere: a0 = 50, a1 =.60, a2 =.05, a3 =.10, a4 =.5, a5 = -400, b0 = 100, b1 =.5, b2 =.2, b3 = -50a) (20 points total 5 points for expression and 15 points for correct and completely labeleddiagram). Given the initial conditions, find expression for consumption function andprovide a completely labeled diagram. Please show all work.b) (20 points total 5 points for expression and 15 points for correct and completely labeleddiagram). Given the initial conditions, find an expression for the aggregate expenditurecurve (AE in terms of Y), solve for equilibrium output and provide a graph of thisaggregate expenditure curve labeling this initial equilibrium as point A. Please add pointA to your consumption function diagram, being sure to label this point completely. Pleaseshow all work.c) (10 points) We now incur shocks as provided in red font. Solve for a new expression ofthe consumption function and aggregate expenditure curve, solve for the new equilibriumoutput and add this new equilibrium point to both of your diagrams (label as point B).Please show all work.d) (10 points) Are your results consistent with the new economy? Why or why not? Explainin detail.

 

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