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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?

Microeconomics, Economics

  • Category:- Microeconomics
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