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-500) + a2 (10,000) + a3 (15,000) + a4 (100) + a5 (2)
2) I = b0 + b1AS + b2CF + b3 (r)
2') I = b0 + b1 (200) + b2 (2400) + b3 (2)
3) G = G
3') G = 700
4) X-M = X-M
4') X-M = -300
Where: a0 = 100, a1 = .90, a2 = .04, a3 = .08, a4 = .8, a5 = -100, b0 = 500, b1 = .5, b2 = .5, b3 = -100
Derive an expression for the consumption function and graph it on your exam sheet. Show all work.