Problem 1: Deriving the Aggregate Demand Function (14 Points] Suppose that we are considering the AEF, which is made up

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Problem 1 Deriving The Aggregate Demand Function 14 Points Suppose That We Are Considering The Aef Which Is Made Up 1 (63.87 KiB) Viewed 38 times

Problem 1: Deriving the Aggregate Demand Function (14 Points] Suppose that we are considering the AEF, which is made up of desired C, G, I, and NX. As in lecture, we will assume that both C and NX respond to prices (p) in the economy. I and G do not. All four are given by: C = 40(10 - p) + 0.85Y I = 200 G = 300 NX = 20(10-p) - 0.18 1. What is the expression for the AEF here? Simplify your answer as much as you can. [3 points] 2. What is the equilibrium Y* if (i) p = 4, and if (i) p = 7? [2 points) 3. What is the equilibrium value of Y for any given level of p? (in other words, you do not know what p is, but you can solve for Y* as a function of p.) [3 points] 4. Use your answer from partc to draw the Aggregate Demand Curve, with Aggregate Demand for Y on the x-axis and the price level on the y-axis. Label both the x-intercept and y-intercept for the AD curve. [2 points) Suppose instead that the price level affected the marginal propensity to consume and the Marginal propensity to import, such that: (note the numbers are different from your previous AEF) AEF = 900 +0.7Y pY 100 5. In this case, what would be the expression for the AD curve as a function of prices? What does this AD curve look like? Sketch a picture of it with Aggregate Demand for Y on the x-axis and the price level on the y-axis (4 points) 1