Describe the effects on the AE curve and on equilibrium national income.

Principles of Macroeconomics
ECON 1250Neil Roberts
Fall 2015
Assignment #3 (20 marks)
Due: Thursday, October 29, 2015

Answer the following with respect to the graph below: (2 marks each)
Desired Aggregate Expenditure ($ Billions)

1.

45°
300

AE

250
200
150
100

I+G

50

I
25
50 100 150 200 250 300
Actual National Income ($ Billions)

a) What is the level of desired investment expenditure (I) and government purchases (G)?
b) What is the autonomous portion of consumption? What is total autonomous expenditure?
c) Starting from equilibrium national income of $250 billion, suppose government purchases decreased by $25 billion.
Describe the effects on the AE curve and on equilibrium national income.
d) Starting from equilibrium national income of $250 billion, suppose the net tax rate increased from 10% to 30% of national
income. Describe the effects on the AE curve and on equilibrium national income.
e) Starting from equilibrium national income of $250 billion, suppose investment increased by $50 billion.Describe the effects
on the AE curve and on equilibrium national income.
2.

Answer the following with respect to the diagrams below: (2.5 marks each)

AS
Price Level

Price Level

AS

E

E

AD
Y*
Economy A
a)
b)
c)
d)

Real GDP

AD
Y*

Real GDP

Economy B

Explain in your own words why in Economy A wages and other factor prices will begin to rise, and why this will increase
firms’ unit costs.
Following your answer in part a, show the effect on the AS curve. Explain in your own words what happens to real GDP and
the price level.
Explain in your own words why in Economy B wages and other factor prices will begin to fall, and why this will decrease
firms’ unit costs.
Following your answer in part c, show the effect on the AS curve. Explain in your own words what happens to real GDP and
the price level.

Notes:
Show all of your calculations and explain your steps.
When drawing graphs, try to be as accurate as possible; poorly drawn or inaccurate graphs will lose marks.
You can think about the assignment in a group, but you have to convince me that you wrote the answer alone; copied
assignments will receive zero.