Equations for fiscal policy.
The economy of a country called Econoland is described by the following desired aggregate expenditure components (all figures in billions of $). For the purposes of this problem, the first set of equations will be referred to as fiscal policy #1.
C = 30 + 0.9 YD,
I = 50,
G = 75,
X = 50,
IM = 0.2Y,
T = 0.15Y
a) find out the short run macroeconomic equilibrium the under fiscal policy #1. Full solutions
b) Why type of output gap is this economy experiencing if Y* = 525? How big is the gap?
c) An election causes a change in government, which leads to a new policy, called policy #2. Policy #2 is intended to stimulate the economy. This is achieved by reducing the tax rate to 11% and by reducing government spending to 25. According to the newly elected politicians this approach "puts money back into the pockets of the taxpayers."
find out the short run macroeconomic equilibrium under fiscal policy #2.
Will the policy achieve its objectives if the economy begins at the short run macroeconomic equilibrium you find outd under fiscal? Policy #1 in part a)?
d) After the election, exports suddenly increased to 160. Determine the SR macroeconomic equilibrium level of Y that would result be under each policy (#1 and #2) if that policy was in effect at the time of the increase.
e) Illustrate what would the SR macroeconomic equilibrium level of DAE be under each policy (both #1 and #2) if exports had fallen to 10 instead of increasing?
f) Which government spending policy is better? How would an economist describe your choice?