Question: 12. Consider the consumption function, the current account mction, and the aggregate demand function. In cases below, answer how they would change: Decrease, Increase or

aggregate demand function. In cases below, answer how they would change: Decrease,

12. Consider the consumption function, the current account mction, and the aggregate demand function. In cases below, answer how they would change: Decrease, Increase or No change. 12.31. Home price fell. Consumption: Current account: Aggregate demand: \fDeterminants of the Current Account Current account: CA = EX - IM. Its functional form: CA = CA(EPF/PH, Yd). - Real exchange rate: q = EPF/PH q1 => CA T - Disposable income: Yd => C 1 => Imports 1 => CA JThe Equation of Aggregate Demand Aggregate demand: D = C(Y T) + 1+ G + CA(EPF/PH, Y 1) Consumption Investment Current account as expenditure expenditure and a function of the real as a function government exchange rate and of disposable purchases, bOth disposable income. 0 Or more simply: D = D(EPF/PH, Y T, I, G) Determinants of Consumption Demand Consumption function: C = C(Y"). Disposable income: Yd = Y T Higher Yd => Higher consumption expenditure But typically, AC

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