Activity of the week.

Reading

general equilibrium model of chapter 3

1. Mankiw assumes that consumption is a function of disposable income alone: C = C(Y-T). Modify the consumption function to make consumption depend on both after tax income and the real interest rate. Explain why you think this might make sense.]
2. According to Mankiw theory in chapter 3, Consider a drop in the world real interest rates.
3. Explain the impact on real Savings and Investment in the U.S in relation to the case study provided in the reading.
4. How do your results differ if consumption does not depend on the real interest rate?
5. Assuming no change in the rate of growth of money in the U.S., will the nominal interest rate change when the world real interest rate declines?
6. Suppose that a consumer has a marginal propensity to consume of 0.7. If this consumer earns an extra $2, her consumption spending would be expected to increase by?
7. In the full model of the economy presented in chapter 3, the variable that adjusts to equilibrate the supply and demand for goods and services is?
8. According to the classical dichotomy, which magnitudes is affected by monetary policy?
9. Consider the following data on the Transalpinian economy

Y = 1,000

C = 700

I = 250 - 10r*

The world interest rate is 5 percent. What are net exports of Transalpinia?

10. According to the quantity equation, if M increases by 3 percent and V increases by 2 percent, then