Assume initial conditions of economy are characterized by

Reference no: EM13396670

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-500) + a₂ (10,000) + a₃ (15,000) + a₄ (100) + a₅ (2)

2) I = b₀ + b₁AS + b₂CF + b₃ (r)

2') I = b₀ + b₁ (200) + b₂ (2400) + b₃ (2)

3) G = G

3') G = 700

4) X-M = X-M

4') X-M = -300

Where: a₀ = 100, a₁ = .90, a₂ = .04, a₃ = .08, a₄ = .8, a₅ = -100, b₀ = 500, b₁ = .5, b₂ = .5, b₃ = -100

Derive an expression for the consumption function and graph it on your exam sheet. Show all work.

Reference no: EM13396670

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