Suppose the initial conditions of the economy are characterized by the following equations. In this problem, we assume that prices are fixed at 1 (the price index is 100 and when we deflate, we use 1.00) so that nominal wealth equals real wealth.

1) C = a0+ a1(Y - T) + a2(WSM) + a3 (WRE) + a4 (CC) + a5(r)

1') C = a0+ a1(Y - 200) + a2 (10,000) + a3 (15,000) + a4 (100) + a5(3)

2) I = b0+ b1AS + b2CF + b3(r)

2') I = b0+ b1(150) + b2(2000) + b3(3)

3) G = G

3') G = 300

4) X - M = X - M

4') X - M = - 100

Where: a0= 165 , a1= .75, a2= .05, a3= .10, a4= .8, a5= - 500, b0= 210, b1= .5, b2= .5, b3= - 200

Derive an expression for the consumption function and graph it.

Derive an expression for the aggregate expenditure curve and graph itt.Solve for the equilibrium output and label this initial equilibrium as point A. Also, add point A to consumption function.

Draw an aggregate demand and an aggregate supply curve , identifying the initial point as point A in this diagram.

NOTE:We are holding the price level fixed at 100 in this problem. draw it with a negative slope going through point A.

We now let G rise to 400 as the Federal Government (fiscal policy) authorities are not happy with the level of GDP. Solve for the new equilibrium output and label as point B on all diagrams

What is the government spending multiplier in this problem and what does this government spending multiplier depend on?