Question

1. For each of the following newspaper headlines, show and explain the impact (if any) on the C, S, I, and AE functions, as well as equilibrium national income.

a. “Revival of consumer confidence leads to increased spending.”

b. “High mortgage rates discourage new house purchases.

c. “Concern over future leads to a reduction in inventories.”

d. “Accelerated depreciation allowances in the new federal budget set off boom on equipment purchases.” e. “Consumers spend as stock market soars

Answer 1

Answer:

a) The consumption function shifts upward and the AE function will also shift up. Equilibrium national income would rise.

b) The investment function shifts down, assuming that housing construction falls when house sales fall. This shifts the AE function down and reduces the equilibrium level of national income.

c) This is a reduction in desired inventory investment. The investment function shifts down, the AE function shifts down, and equilibrium national income falls

d) The investment function shifts up, the AE function shifts up, and equilibrium national income increases.

e) The rise in the stock market creates wealth (on paper) for those who own equities. This leads to a rise in desired consumption, an upward shift in the consumption function. The AE functionshifts up and equilibrium national income rises.