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The Aggregate Consumption Function


The aggregate consumption function for an economy is:

C=$200 billion + .75 Yd, Yd= disposable income.

Assume that aggregate demand must shift by $160 billion to close a recesionary gap.

A: what change in government spending will return the economy to full employment GDP?

B: By how much will taxes have to change to close the GDP gap?

C: the government has decided to finance the increased expenditures necessary to
close the gdp gap, by increasing taxes. What will be the necessary changes in govt
spending and taxes to close the GDP gap? Why?

1.) Suppose bank reserves are $100 billion. The required reserve ratio is 20% and
excess reserves are zero.

A.) Calculate how many dollars worth of checkable deposits are being supported?

B.) If the fed wants to decrease checkable deposits by $50 billion, by how much
must bank reserves change?

Answer questions based on following

Bank New Reserves New Required Reserves Checkable

A (1) $600

B (2) $400

What dollar amount goes in blank 1?

What is the requred reserve ratio?

What dollar amount goes in blank2?

What does the cash leakage between bank a and blank b equal?

What dollar amount goes in blank 3?

A fellow student in your economy class stops you in the hallways and says, "An
increase in the demand for money causes the interest rate to rise. But a rise in the
interest rate causes people to demand less money. Therefore, increases in money
demand largely cancel themselves out, and have very little effect on the interest
rate." Is this correct? Why or why not? (Hint draw a graph)

Explain and graph each of the following outcomes in terms of shifts in aggregate
demand and short run aggregate supply

A recession emerges and the rate of inflation increases.

The unemployment rate increases, real GDP falls, but the price level does not change

Economist smith and economist jones are testifying before congress as to the
effectiveness of expansionary fiscal policy.

Jones: an increase in govt spending will ultimately only increase the price level
and have no effect on output or unemployment,

Smith: an increase in govt spending will have no effect on the price level or gdp

Use aggregate demand/aggregate supply model to evaluate each economist's statement..

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Solution Summary

This posting articulates the aggregate consumption function.