Question

1. Assume that in 2017, the following prevails in the Republic of Askil:

          Y = 10,000

          C = 8,000 G = 1000

          S = 1,000 T = 0

          I (planned) = 1,000

Assume that households consume 90% of their income and save 10% of their income. That is C =.9Yd and S = .1Yd.

1. Is the economy of Askil in equilibrium? What is likely to happen in the coming months?
2. If 10,000 is full employment equilibrium level of Y, what fiscal policy would you recommend? Be specific on the amount of change in fiscal policy.
3. If full employment GDP is 22000, what fiscal policy would you recommend?
4. Determine a level of C, G, I, and T that would produce an equilibrium of 10,000.
5. Assume the government spends an additional 500 and increases taxes by an additional 500. Determine the impact on GDP.

Answer 1

given data Y=10,000 C+8,000 ,62=1000 S=1,000 , T=0 IC Planned)=1,000 house holds consume =90%, income & save 10% C 2,9yd and 5 5.1yd * we are given that government has increased its spending by 500 and at the same time the taxes are also increased by the same amount. * This indicates that there is no influence on the budget of 1. The government, and thus, we are dealing with the balanced budget multiplies. * The value of this multiplier is 1, implying that equilibos- Um GDP increases by the same amount by which the government spending has increased, * Therefore, equilibrium GDP will increase by 500 as a result.