Reference no: EM1314390

The economy of a country called Econoland is described by the following desired aggregate expenditure components (all figures in billions of $). For the purposes of this question, the first set of equations will be referred to as fiscal policy1. 

C = 30 + 0.9 YD,

I = 50,

G = 75,

X = 50,

IM = 0.2Y,

T = 0.15Y

a) Calculate the short run macroeconomic equilibrium the under fiscal policy1. Full solutions

b) Why type of output gap is this economy experiencing if Y* = 525? How big is the gap?

c) An election causes a change in government, which leads to a new policy, called policy2. Policy2 is intended to stimulate the economy. This is achieved by reducing the tax rate to 11% and by reducing government spending to 25. According to the newly elected politicians this approach "puts money back into the pockets of the taxpayers."

Calculate the short run macroeconomic equilibrium under fiscal policy2.

Will the policy achieve its objectives if the economy begins at the short run macroeconomic equilibrium you calculated under fiscal? Policy1 in part a)?