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The consumption function is C = 400 + .7(Y – T) and the function for net...

  1. The consumption function is C = 400 + .7(Y – T) and the function for net exports is

Xn = 20 - .15 Y + .2 Yf + .3 E. I is exogenous, G is set by policy, and Yf = foreign GDP and the exchange rate E do not change.                                                                     [15 points]

  1. What effect will an increase in G of $100 have on Y?
  2. What effect will a decrease in T of $100 have on Y?
  3. What would happen to your answers to (a) and (b) if the saving rate suddenly rose? Would your answers by higher, lower, or no change? Explain all your answers.
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