Study questions for first test (2009) continued
Chapter 3: “Questions and Problems” 1-3, 4 a-c, 5
19. Describe the three types of investment, and the difference between government “spending” and
“transfers.”
20. Consumption function: Mathematical statement of it; graph; and the name, definition, and mathematical expression of the slope. What is Keynes’ “fundamental psychological law,” and how does it relate to this function? What makes C shift up or down?
21. How is consumer confidence measured? Google “consumer confidence” and read the Conference
Board release from January 27. What is the current level of consumer confidence? How does that compare with rates in the past? Based on the release, what are four questions that consumers are asked?
22. Graph the consumption function, and add in a reference line that illustrates all the points where C equals Y
D
. For each level of Y
D
, indicate the level of savings.
23. Assume the economy is closed, and solve for the intercept and slope of Z.
24. Gra ph our T function. Is this an “income tax”?
25. Solve for the equilibrium value of Y. What does that indicate about the value of the multiplier?
26. Study the graphical illustration of the multiplier (it is also in the book) to understand the workings of the multiplier and to obtain the value of the multiplier. Repeat the exercise with $5 billion (instead of
$1 billion). Repeat again for $X billion. Repeat again for a decrease of $X.
27. Define fiscal policy. If c
1
= .9 and G decreases by $100, what happens to equilibrium Y? Illustrate with the Keynesian cross. If T decreases by $100, what is the effect of just this change in taxes?
On a separate graph show this impact. Why is the impact of G bigger? Now determine the impact of making both changes simultaneously. Graph this scenario.
28. Briefly explain the controversies concerning the stimulus package. Where they fit, link them to
Blanchard’s “Warning” on 58 and 59.
29. According to pages 55, where did the forecasters make mistakes? What was their error?
30. State the two expressions for the equilibrium in the goods market. Derive one from the other as we did in class.
31. In the goods market model, what are our assumptions, and which are the endogenous and exogenous variables?
-----------------------------------------------------------------------------------------------------------------
Autonomous spending = c
0
– c
1
T + I + G
Let c
0
= $500 c
1
= .75
T = $1000
I = $500
G = $2000
How much is autonomous spending?
Let G increase by $100. What is the change in autonomous spending?
Let T decrease by $100. What is the change in autonomous spending?
The effect on autonomous spending is __________ for the tax reduction, because households spend only some of the tax reduction. All of the extra G is spent.

32. Graph the Keynesian cross, label, and indicate the equilibrium. If Z increases by $X, what happens to Y? Show on the graph.

The Conference Board Consumer Confidence Index ™ Dips in January
January 27, 2009
The Conference Board Consumer Confidence Index™, which had decreased in December, inched lower in January and continues to be at a historic low. The Index now stands at 37.7 (1985=100), down from
38.6 in December. The Present Situation Index declined slightly to 29.9 from 30.2 last month. The
Expectations Index decreased moderately to 43.0 from 44.2.
The Consumer Confidence Survey™ is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS. TNS is the world's largest custom research company. The cutoff date for January's preliminary results was January 21st.
Says Lynn Franco, Director of The Conference Board Consumer Research Center: "The Consumer
Confidence Index ™ continues to hover at all-time lows (Index began in 1967) and it appears that consumers have begun the New Year with the same degree of pessimism that they exhibited in the final months of 2008. The minor change in the Present Situation Index suggests that economic conditions did not deteriorate significantly further in January but, on the other hand, they did not improve either. Looking ahead, consumers remain quite pessimistic about the state of the economy and about their earnings.
And, until we begin to see considerable improvements in the Expectations Index, we can't say that the worst of times are behind us."
Consumers' assessment of overall current conditions remains pessimistic. Those saying business conditions are "bad" increased to 47.9 percent from 45.8 percent, while those saying business conditions are "good" declined to 6.4 percent from 7.7 percent last month.
Consumers' assessment of the labor market, however, was slightly more positive. Those claiming jobs are "hard to get" edged down to 41.1 percent from 41.5 percent in December, while those stating jobs are
"plentiful" edged up to 7.2 percent from 6.5 percent.
Consumers' short-term outlook remains quite pessimistic. Those expecting business conditions to worsen over the next six months decreased slightly to 31.1 percent from 32.9 percent, while those anticipating conditions to improve remained relatively unchanged at 13.3 percent in January, compared to 13.4 percent in December.
The job outlook remains somewhat mixed. The percentage of consumers expecting fewer jobs in the months ahead decreased to 36.7 percent from 40.6 percent, while those expecting more jobs edged down to 9.4 percent from 9.8 percent. The proportion of consumers expecting an increase in their incomes declined to 10.0 percent from 12.7 percent.