Assume an economy with the following variables: YN = 20000; t = 17.5% ; YA = 19,000; G = 7000 ; Ta = 500.
a) Compute the amount of taxes at natural GDP
b) Compute the N.E.D (Natural Employment Deficit/Surplus). Express as a percentage of the natural GDP (YN).
c) Policymakers decide to reduce the size of the N.E.D (natural deficit) by 8% of the natural GDP. What will be the size of the N.E.D under these conditions?
d) Given no change in the tax rate t, compute by how much they should cut G to accomplish their goal in question c.
e) Given no change in G, what should be the tax rate in order to accomplish the policy goal in question c.
f) Suppose you are asked to make a policy recommendation that requires you to increase the tax rate (from 17.5%) and decrease government spending. What combination of tax rate and spending cut would you recommend to meet the policymakers’ goals in question c? Answers may vary.