Problem: Assume that in 2008, 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= .8Yd and S= .2Yd.
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, and I=$40. Is Nurd’s economy in equilibrium?
E) Starting with the situation in part D, suppose the government starts spending $30 each year with no taxation and continues to spend $30 every period. If I remains constant, what will happen to the equilibrium level of Nurd’s domestic product (Y)?
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 part F differ from your answer to part E? Why?