Name: Jennifer Chesley

(80 points total)

Section: TR 2020

E-Portfolio Signature Assignment

Salt Lake Community College
Macroeconomics - Econ 2020
Professor: Heather A Schumacker

Please type your answers to the following questions. If you need to hand draw the graphs and then scan them in
you may. When you have completed this assignment post it to your e-portfolio. Make sure to put your
reflection statement on your web site. (4pts)
1.

What is the formula for PAE (write out the full name)? Circle the largest component and fill in the chart. Under each put the
components and something unique. (19pts)
PAE = Consumption
+ Investment
+ Government
+ Net Exports
2/3 of all spending
most volatile part of Y
spending determined by 3 things
usually negative for U.S.
Components:
Components:
Components:
Components:
Circle the largest category
1. Durable Goods
1. Inventory
1. Goods
1. Exports
2. Non-Durable Goods
2. New Construction
2. Services
2. Imports
3. Service
3. New Capital
Excludes:
Excludes:
1. Stocks/Bonds

1. Interest on Debt
2. Transfer Payments

2.

Given the following information, what is the short-run equilibrium output (show your work) _____2610_______ What is the
autonomous expenditure ________1305_____ what is the induced expenditure ________.5Y_______ where would it cross the Y
axis________1305______ what is the slope of PAE _____.5__________ what is the multiplier ________2_________ if there is a
10 unit increase in PAE what will happen to the short run equilibrium (increase or decrease)_____Increase______ and by how
much _______20________ and will it lead to a recessionary gap or an expansionary gap ___expansionary_____
Ca = 890

MPC = 0.5

PAE = 890 + .5(Y-250) + 220 + 300 +20

PAE = 890 + .5Y 125 + 220 + 300+ 20
PAE = 1305 + .5Y
In PAE = Y= 1305 + .5 Y
.5Y = 1305
Y = 2610
3.

IP = 220

G = 300

X-M = 20

(9pts)

T = 250

multiplier = 1/[1-MPC(1-t)] = 1/[1-.5(1-0)] = 1/.5 = 2

What is the problem associated with being at AD2 that makes policy makers concerned? (1pt)
Inflation

4.

Who does fiscal and monetary policy? What are 2 fiscal policies and 3 monetary policies to correct a situation where the economy
is naturally at AD* but finds itself at AD2, as seen in the graph on the previous page. Briefly explain how each of these policies
would work to correct the situation. (12pts)
Who does fiscal policy: Legislative Actions; Approved by the President

1.

Increase in Taxes
People would pay more in taxes, so they would be a decrease in disposable income. If there is less disposable
income, they have less to spend which reduces consumption. Aggregate demand curve will shift to the left.

2.

Decrease in Government Spending

A decrease in government spending will reduce the government potion of PAE, which will shift the aggregate
demand curve to the left.

Who does monetary policy: Federal Reserve

1.

2.

Open Market Operation

An open market sale of bonds would decrease the bank reserves and the money supply. When the money supply
decreases, the interest rate will increase which will cause the aggregate demand curve to shift to the left.
Reserve Requirement
If the reserve requirement is increased, the banks will need to hold on to more money, so the lending capacity of
the banks will decrease which will cause the aggregate demand curve to shift to the left.

3.

Discount Rate
As the discount rate is increased, banks will borrow less money. The decrease in excess reserves will impair the
lending capacity of the bank and the aggregate demand curve will shift to the left.

5.

Use the excel sheets provided to complete this problem. Scenario 1: If the initial deposit into a bank is $5,000 and the reserve
requirement is 10% use formulas to fill in the chart all the way to completion (where there will be 0 new deposits). Fix the cell
references for the reserve requirement when entering your formulas on the first line such that you can drag your information down
the rows. For scenario 2, change the reserve requirement to 40%. (10 pts)

See Excel: Scenario 1 & 2

6.

Create a third page of the excel spreadsheet and label it GDP. Enter in the data given below for 2010 U.S. expenditure numbers
and then create a pie chart with percentages. (Under insert then click pie. When the graph comes up click Chart Tools, Design,
Quick Layout and
select a pie chart with percentages. Create your own
Consumption Expenditures
10362.3 selections for each piece of the pie and put a
personal color
Investment Expenditures
1763.8 the percentages.) Make sure to title your chart: GDP
background color on
Government
Expenditures
2974.7
2012 U.S. (5pts)
Net Exports
-499.4

See Excel: GDP

7.

Begin in equilibrium in each of the following graphs; draw the effects from question 2 above as they would apply in each graph
below. Next draw the effects of an anti-inflationary policy taken by the fed to correct the result from question 2 - use all three
graphs (Money Supply and Money Demand, AD/AS, and PAE). Explain what is happening in each graph and overall in the
economy as the due to the anti-inflationary policy. (20 pts)
Money Supply and Money Demand Graph
Nominal
Interest Rate
Aggregate
Demand and
Aggregate Supply

Money Supply Curve (MS)

PL

Real GDP

MS1
AS

AD

Money Demand (MD)

PAE

PAE

PAE = Y
PAE2
PAE1

45
Y
When there is an increase in the planned aggregate expenditure, the PAE line will shift up. There will be a greater demand for
goods, so the aggregate demand line will shift out and the demand for money will also shift out. A restrictive monetary policy will
shift the money supply curve to the left from MS1 to MS which will result in a higher interest rate. As a result of higher interest rates,
investment spending will decrease, causing the aggregate demand curve to shift to the left from AD1 to AD. Since investment spending
has decreased, the PAE will also shift downward.