I only need an answer for parts d, e, and f please. I have
posted the whole question though, in case that you need to refer
back to it.
Monetary & Fiscal Policy, and Debt:
1)Y = C + I + G + NX
2)C = 49 + 0.9DI
3)T = 10 + 1/3Y
4)I = 400 – 2,000(i)
5)G = 800 6)NX = 60
a) If the FED decides to set the interest rate at i = 0.05, what
will be equilibrium GDP?
b) State the Government Budget and indicate whether it is in
surplus or in a deficit.
c) A recession hits the economy which leads to a reduction in
consumption, specifically assume for now: C = 106 + 0.6DI. Compute
the new GDP and the new budget.
d) Democrats and Republicans are arguing about whether to reduce
taxes or increase Government expenditure to stimulate the economy.
Since they haven’t found a compromise, yet, the FED decides to step
in and take some actions. i. Describe the policy tools the FED can
use. ii. If Janet Yellen (current Chair of the FED) asked you for
advice on which policy tool to use, what would you recommend her to
do and why? (Hint: The “why” part is what I really care about here.
You have to justify your choice, otherwise you get zero credit for
e) Republicans won the argument so that the government cuts the
tax rate from 1/3 to 1/6 while at the same time the FED lowers the
interest rate from 0.05 to 0.02. What will be the new GDP? Note
that the consumption function from part c) is still valid here.
f) Finally, given your results in e), discuss the implications
on government debt and whether you find that troubling or not.