Assignment

Question 1 (The Income-Expenditure Model): From 2008 to 2013, Eastlandia experienced large fluctuations in aggregate consumer spending and disposable income, but wealth, the interest rate, and expected future disposable income did not change. The accompanying table shows the level of aggregate consumer spending and disposable income in millions of dollars for each of these years. Use this information to answer the following questions.

a) Plot the aggregate consumption function for Eastlandia.
b) What is the marginal propensity to consume? What is the spending multiplier? Show your work.
c) What is the aggregate consumption function? Show your work.

Question 2 (AD/AS Model): State whether the following events would shift the AD curve to the right, to the left, or not at all and explain your answer (which component of AD is affected, how etc.):

a. Foreign income decreases.
b. The exchange rate value of the dollar increases.
c. Consumers expect lower income in the future.

Question 3 (AD/AS Model): In the accompanying diagram, the economy is in long - run macroeconomic equilibrium at point E1 when an oil shock shifts the short - run aggregate

supply curve to SRAS2. Based on the diagram, answer the following questions.

a) How do the aggregate price level and aggregate output change in the short run as a result of the oil shock? What is this phenomenon known as?

b) What fiscal or monetary policies can the government use to address the effects of the supply shock? Use a diagram that shows the effect of policies chosen to address the change in real GDP. Use another diagram to show the effect of policies chosen to address the change in the aggregate price level.

c) Why do supply shocks present a dilemma for government policy makers?