Reference no: EM1346158
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? Explain what is Nurd's equilibrium level of income? Explain 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? Explain how does your answer to f differ from your answer to part e? Why?
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