# Assume that in 2011, the following prevails in the Republic of Nurd:

Assume that in 2011, the following prevails in the Republicof Nurd: Y = \$200 G = \$0C = \$160 T = \$0S = \$40I (planned) = \$30Assume 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 NurdÃ¢â‚¬â„¢sequilibrium level of income? What is likely to happen in thecoming months if the government takes no action?b. If \$200 is the Ã¢â‚¬Å“full-employmentÃ¢â‚¬Â level of Y, what fiscal policymight the government follow if its goal is full employment?c. If the full-employment level of Y is \$250, what fiscal policymight the government follow?d. Suppose Y = \$200, C = \$160, S = \$40, and I = \$40. Is NurdÃ¢â‚¬â„¢seconomy in equilibrium?e. Starting with the situation in part d, suppose the governmentstarts spending \$30 each year with no taxation andcontinues to spend \$30 every period. If I remains constant,what will happen to the equilibrium level of NurdÃ¢â‚¬â„¢s domesticproduct (Y)? What will the new levels of C and S be?f. Starting with the situation in part d, suppose the governmentstarts taxing the population \$30 each year withoutspending anything and continues to tax at that rate everyperiod. If I remains constant, what will happen to the equilibriumlevel of NurdÃ¢â‚¬â„¢s domestic product (Y)? What will bethe new levels of C and S? How does your answer to part fdiffer from your answer to part e? Why?

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