Assume that in 2015, 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 in- come, they save 20 percent of their income, MPC = 0.8, and MPS = 0.2. That is, C = 0.8Yd and
Q7. Assume that in 2015, 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 in- come, they save 20 percent of their income, MPC = 0.8, and MPS = 0.2. That is, C = 0.8Yd and S = 0.2Yd.
- 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?
2. If $200 is the “full-employment” level of Y, what fiscal policy might the government follow if its goal is full employment?
3. If the full-employment level of Y is $250, what fiscal policy might the government follow?
4. Suppose Y = $200, C = $160, S = $40, and I = $40. Is Nurd’s economy in equilibrium?
5. Starting with the situation in part d, suppose the government starts spending $30 each year with no
6. 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 part f differ from your answer to part e? Why?
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