Consider a closed economy, where wages are sticky in the short run. The consumption function is

C = c0 + c1(Y T ), where the marginal propensity to consume c1 is equal to 0.4. Initially the economy is in equilibrium at Y = Y and P = P e, where P e is the price level that was expected when agents agreed their fixed nominal wage contracts. The short-run aggregate supply curve (SRAS) is horizontal.

Suddenly the government increases government spending G by $300.

For the following questions, if you think a variable goes up by (say) $50, just enter 50 as your answer. If you think a variable goes down by $50, enter -50 as your answer. If you think a variable doesn't change at all, enter 0 as your answer.

9. By how much will output Y change in the short run?

10. By how much will consumption C change in the short run?

11. By how much will investment I change in the short run?

12. By how much will output Y change in the long run, after wage contracts are renegotiated?

13. By how much will consumption C change in the long run, after wage contracts are renegotiated? 14. By how much will investment I change in the long run, after wage contracts are renegotiated?