Assume that in 2009, the following prevails in the Republic of Askil: Y= 5,000 C
ID: 1102143 • Letter: A
Question
Assume that in 2009, the following prevails in the Republic of Askil:
Y= 5,000
C= 4,000
S= 1,000
I (planned) = 1,250
G = 0
T = 0
Assume that households consume 75% of their income and save 25% of their income. That is C = .75Yd and S = .25Yd.
a) Is the economy of Askil in equilibrium? What is likely to happen in the coming months?
b) If 5,000 is full employment equilibrium level of Y, what fiscal policy would you recommend?
c) If full employment GDP is 5,750, what fiscal policy would you recommend?
d) Determine a level of C, G, I and T that would produce an equilibrium of 5,000.
e) assume the government spends 100 and increases taxes by 100. Determine the impact on GDP.
Explanation / Answer
A brief look at government GDP through an investment-savings approach, as well as a GDP production approach, are considered when isolating which factors affect government GDP and the economy's equilibrium.