Homework: Unit #3

Instructions: Answer all of the following questions. Be sure to complete each part of every question. When you turn in your homework, this handout must be used as a cover sheet. Place this sheet on top of your answers, staple them all together, and fold it all lengthwise with this side out and your name and row number showing.

1. Explain why the aggregate demand curve is downward sloping.

2. List two different types of changes that could cause a decrease in AS.

3. Why is the shape of the aggregate supply curve an important issue with regard to macroeconomic policy? What would Keynesians argue is the likely shape of the AS curve? What would classicals argue is the likely shape of the AS curve?

4. If the MPC is 0.75, what is the MPS? What is the multiplier?

5. Assume AE = C + I. Also assume that autonomous consumption = $40 the MPC = 0.95 and I = $1000.

· What is the equation for this line (i.e., the aggregate expenditure function)?

· What is the equilibrium level of output & income?

· How much Consumption is desired at this level of income?

· What is the equation for the line showing how savings is affected by income? (Hint: The vertical intercept is not equal to autonomous consumption and the slope is not the MPC, but these two numbers do give you all the information you need.)

· How much savings is desired at the equilibrium level of income?

· How does savings compare to investment?

6. Assume AE = C + I + G and that autonomous consumption = $50, the MPC = 0.8, G = $500, and I = $250.

· Write the equation for this line (i.e., the aggregate expenditure function).

· What is the equilibrium level of output?

· Assume the full-employment level of output is $5000, how much aggregate expenditure would we expect at this level? Would there be a recessionary gap or an inflationary gap? How large is this gap?

· If the government wanted to correct this policy by changing taxes, what would a Keynesian recommend?

· If the government wanted to use changes in government spending, what would a Keynesian recommend?

7. Assume I deposit $1000 in a bank. Also assume the required reserve ratio is 5 % (be careful with the decimal).

· What is the money multiplier (show work)?

· Use T-accounts to show how banks can use this money to create more money. In your example, show two rounds of money creation.