Fiscal Policy, Equilibrium
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For part A my answer was... No, they are not in equilibrium. Equilibrium income level is $150. If the government takes no action then there will be an unplanned inventory increase and firm will have an incentive to cut back output.
For part B and C the government must adjust spending to achieve full employment???
For part D I'm confused. If nothing has changed then wouldn't this be the same as part A? Equilibrium is calculated as Y= C+I+G.
That's as far as I was able to get yet. Thanks for any help.
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This solution helps with problems involving fiscal policy and equilibrium.
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See attached.
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.
The first thing we need to do here is to set up the equations we need. The most important one is:
Y = C + I + G + X - M
With the numbers given above we have no X and M, or it is a close economy. So we only need to worry about
Y = C + I + G
We also have
Y = C + S + T
Households consume 80% of their income. Therefore, we can say that
C = 0.8YD = 0.8(Y - T)
The second part is due to the fact that
YD = (Y - T)
A) Is the economy of Nurd in equilibrium? What is Nurd's equilibrium level of income? What is likely to happen in the ...
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