You are given the following income-expenditures model for the economy of Vulcan.

Question

You are given the following income-expenditures model for the economy of Vulcan. C = 200 + .8Yd T = 25 G = 75 I = 125

a. What is the equilibrium level of income in Vulcan?

b. What would the level of expenditures be if the economy were operating at $2000? Make a forecast for the future of the Vulcan economy.

c. The policymakers of Vulcan are considering stimulating the economy to offset a decline in consumer confidence. They are debating decreasing taxes by 15 or increasing government spending by 15. Which of these policies (changing T or changing G) will have a greater positive impact on national income? Be specific and show your work.

d. To offset Vulcan's fiscal policy changes, the central bank of Vulcan decides to raise the interest rate. Explain how this would impact the money market of Vulcan. Describe ONE monetary policy tool that the central bank could use to create this change in the money market.

I want specific answers for especially #c and #d!

Explanation / Answer

a) Y = 75 + 125 + 200 + 0.80 * (Y - 25)   [Original Equation as given in question.]

Y = 400 + 0.80 Y - 20

Y = 380 / 0.20

Y = 1900 [ The equilibrium level of income in Vulcan ]

c) Decreasing Taxes by 15 or increasing government spending by 15.

i) Decreasing Taxes (T) by 15.

Y = 75 + 125 + 200 + 0.80 * (Y - 10)

Y = 400 + 0.80 - 8

Y = 392 / 0.20

Y = $ 1960

ii) Increasing government spending (G) by 15.

Y = 90 + 125 + 200 + 0.80 * (Y - 25)

Y = 415 + 0.80Y - 20

Y = 395 / 0.20

Y = $ 1975

Conclusion:- Increasing the government spending will have a greater positive impact on national income than decreasing the taxes because increasing the government spneding will results in income of $ 1975, whereas decreasing taxes will results in income of just $ 1960.

d) If the Central Bank raises the interest rates, there will be decrease in the market value of money market funds. However, the dividend paid on these funds will increase. Net Asset value (NAV) of these short-term money market funds will remains constant i.e., unchanged.

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