Assume that in 1998, the following prevails in
the republic of Nurd: Y=$200 G=$0 C=$160 T=$0 S=$40 I=(planned)=$30
Assume that households consume 80 percent of their income, they save 20
percent of their income, MPC+.8, and MPS=.2. That is, C=.8y and S=.2y
a.Is the economy of Nurd in equilibrium? What is Nurd's equilibrium
level of income? What is likely to happen in the coming months if the
government takes no action? b.If $200 is the full employment level of Y,
what fiscal policy might the government follow if its goal is full
employment? c.If the full employment level of Y is $250, what fiscal
policy might the government follow? d.Suppose Y=$200, C=$160, S=$40, an
I=$40. Is Nurd's economy in equilibrium? e.Starting with the situation
in part d, suppose the government starts spending $30 every period. If I
remains constant, what will happen to the equilibrium level of Nurd's
domestic product(Y)? What will the new levels of C and S be? f.Starting
with the situation in part d, suppose the government starts taxing the
population $30 each year without spending anything and continues to tax
at that rate every period. If I remains constant, what will happen to
the equilibrium level of Nurd's domestic product (Y)? What will be the
new levels of C and S? How does your answer to f differ from your
answer to part e? Why?
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