$525 2004 $570 $450 $510 2005 $600 2006 $630 2007 $560 $600 $750 2008 $750 a. Plot the aggregate consumption function. 7. Given: Solve for: b. The Marginal Propensity to Consume = c. The Marginal Propensity to Save = d. The Aggregate Consumption formula is A = 1200 MPC = 2/3 Ip = 400 G = 500 NX=-100 Y*, C, and the Multiplier. The G increases by 100. Solve for the change in Y, the new Y*, and lu. 8. Two major negative shocks to the U.S. economy in 2007 lead to the Great Recession of 2007-2009. Using a short- run AD-AS graph, draw the oil shock then the housing shock to move from Y and P, to Y2 and P2, and to Y3 and P3. a. Draw the original AD-AS with AD1, AS1, E1, Y and P labelled. b. Crude oil prices increased from $54 to $93 per barrel over 2007. Illustrate this change by shifting the appropriate curve, labelling it as A_2. Then label E2, Y2 and P2. c. Home prices fell by an average of 3% over 2007, decreasing household wealth. Illustrate this change by shifting the appropriate curve, labelling it as A_3. Then label E3, Y3 and P3. 9. Starting at a long-run equilibrium, illustrate on an AD-AS graph how a demand shock can create an output gap, then the SRAS will self-correct back to a new long-run equilibrium. Identify the gap created by the event. The event: In the private sector, there is a decline in households' wealth due to a decline in the stock market. 10. In the short run, determine whether the following event causes a shift of a curve or a movement along a curve on the Aggregate Demand-Aggregate Supply graph. holdings. The in the a. Event: A fall in the aggregate price level increases the purchasing power of households' and firms' money curve experiences a direction. b. Event: The government reduces military spending. The In the curve experiences a direction. 6