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Determining the consumer confidence

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1. Suppose the consumption function is: C = a1 Yd + a2 WRE/S + a3CC Where all the a's (the sensitivity parameters) are greater than zero. Initial conditions: Let a1 = 0.65, a2 = 0.04, a3 = 0.5, WRE/S = 18,000: CC = 70 Solve for C in terms of Yd. Select the correct equation.

None of these are correct

C = 685 + .64 Yd

C = 765 + .60 Yd

C = 755 + .65 Yd

C = 70 + .65 Yd

2. Use the equation you found in #1 and let Yd = 2000. C is equal to:

3. Suppose that the stock market rallies so that WRE/S increases to 22,000. Additionally, consumer confidence (CC) rises to 120. Re-solve for C in terms of Yd. Select the correct equation.

None of these are correct

C = 940 + .65 Yd

C = 830 + .65 Yd

C = 980 + .64 Yd

C = 930 + .60 Yd

4. Now suppose disposable income (Yd) falls due to a tax increase (Uncle Sam is trying to balance the budget) to 1800. Solve for the level of consumption using the equation you found in question #3. Consumption (C) is equal to:

5. Now we will calculate the level of consumption that would have occurred if Uncle Sam did not raise taxes. In other words, use the equation you found in question 3, but keep Yd at its original value of 2000. Consumption (C) is equal to:

6. Look at the consumption values you calculated in #2 and #4. The percent change in consumption between those values is: _________%

Reference no: EM132222106

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