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 Nurd’sequilibrium level of income? What is likely to happen in thecoming months if the government takes no action?b. If $200 is the “full-employment†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 Nurd’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 Nurd’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 Nurd’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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