PROBLEM 1.

3
a) Total expenditure = E = C+I+G = 16+30+0 = $190
Total Income Y = $200
Since Y does not equal to E, the economy of Nurd is not in equilibrium
At Equilibrium, Y = E = $190
If the government takes no action, inventory will decrease to balance income and
expenditure.
b) Expansionary fiscal policy is needed to increase outpu to achieve full employment
by increasing government expenditure.
c) Expansionary fiscal policy is needed to increase outpu to achieve full employment
by increasing government expenditure.
d) Total expenditure = E = C+I = 160+40 = $200
Total income = Y = $200
Since Y equals E, the economy of Nurd is in equilibrium.
e) Y = C+I+G = 0,8Y+30+30
0,2Y = 60
Y = 300
The equilibrium level of output will increase to $300
C = 0,8*300 = $240
S = 0,2*300 = $60
f) Y = C+I+G = 0,8(y-30)+I+G = 0,8Y-24+30+30
0,2Y = 36
Y = 180
The eqilibrium level of output will decrease to $180
C = 0,8*180 = $144
S = 0,2*180 = $36
The increase in government expenditure in e is expansuonary while the increase in
tax in f is contractionary, so they have opposite effect on income, and hence
consumption and saving.

PROBLEM 1.4
First to know how war can end the recession, it is important to know what the
recession is. The recession is the decline in economic activity marked by at least two
consecutive quarters of the country's gross domestic product (GDP). There has been much
debate on how to end war. Sometimes disgusting actions can have a positive effect on the
economy. So we will not be overly concerned about morals if the goal is to get out of the
recession. The war involves the destruction of weapons and ammunition, This use of
government to build weapons and ammunition is Rading to an ever-increasing monetary
policy. The role that world war I played in eradicating the Great Depression can be
analyzed by examining the historical structure of the uns. GDP from A29 to the postwar
period. world war lil is a very different era in terms of resources committed to conflict and
change related to the structure of the market economy. In 1941, government spending
represented about 30% of GDP, or about $ 408 billion..
 This increase in costs helps to end the recession. Price control and ratings have
played an important role in delaying consumption. It was difficult for households to buy
equipment such as wäshing machines, irons or water heaters because immature materials
and the production capacity needed to produce these items were required in the war effort.
New administrative structuresestablished..

Statistics showed a rise in GDP during the war. But that just reflects misdefined
statistical analysis. The military guns, tanks, ships, and planes produced and counted as
showing rising GDP did not reflect improved standards of lining for working people, or
anyone else, Yes, they did win the war, and that victory was a social good, just as
removing Saddam Hussein from power was à social good, But these were not economic
goods and services, and shoud not be counted as such.

The sale prices of goods and services sold in voluntary market transactions reflects
the true value of the goods and services produced, because they reflect what consumers are
willing to pay for them, and so reflect the benefit that consumers see in them. But the same
voluntary market transactions where consumers are spending their own hard earned money
were not involved in the governments acquisition of the miltary guns, tanks, ships and
planes produced during world war I. The cost of all that military materiel was simply
added to GDP, as if it reflected increased production, But wowd not a better measure of the
economic value of that military materiel, and of any coerced government transaction, be to
subtract the cost of that production from GDP, rather than adding it?

Perhaps this economic reality can be seen better in other military conflicts. Did the
American Civi war reflect a time of soaring economic prosperity for America, when both
the south and the worth were producing weapons of as much mass destruction for
Americans as was feasible at the time? what about the cost of the Mexican-American war
in the 1840s? Did the cost of the vietnam war represent a net addition to, or a net
subtraction from, American GDP? or the cost of the most recent wars in Iraq and
Afghanistan?

I am not à pacifist who thinks defense spending has no value. But that value cannot
be measured the same as consumer or productive goods and services that do increase the
standard of inving for working people and their familes, and are purchased through
voluntary market transactions, world war il institutionalized the falling standards of ining
of the Depression through wage and price controls, and extensive rationing of consumer
goods and services. The economic deprivation, and reduced standards of living continued,
atthough people perceived it was now for a good cause.

But increased government spending does nothing to create economic recovery

growth and prosperity. That is because the money to finance that increased goverment
spending is drained from the private sector, either through increased taxes, or increased
borrowing. That entire transaction involves a net drag on the economy. Increased taxes to
finance the increased spending involve counterproductive incentives that reduce
production and growth, increased government borrowing drains investment capital from
productive activities in the private sector and relocates it to nom productive government
consumption.
 There can never be inadequate demand for any good or service in a free market
economy which is the problem Keynesian witch doctors think they are sahing. if demand
for any good or service is insufficient to buy up all the available supply the price for the
good or service will de clime, increasing demand and reducing supply until they are equal.

This was al further demonstrated by the end of word war I. As George Gilder
explains in his brillant, recent, pathbreaking book, Knowledge and Power. The information
Theory of Capitalism and How it is Revolutionizing Our world.

PROBLEM 1.5
The condition of macro-economic equilibrium is AD = Y

The derivation of this expression could be presented as,

AD = Y

C+I+G = C+S+T

I+G = S+T

Approaching towards the conclusion part, the equilibrium situation requires the equality of
the pair of investment adn government spending and the pair of taxes and savings.

PROBLEM 1.6
Disposable income = Output (Y) – Net taxes (T)

Consumption spending (C) = 800 +0,6 x Disposable income

Saving = Disposable income – Consumption spending

Planned aggregate expenditure = C + Government purchases (G) + Planned investment

spending (I)

Unplanned inventory change = Y – Planned AE

Unplanned
Planned
Y T DI C S I G inventory
AE
change
2100 100 2000 2000 0 300 400 2700 -600
2600 100 2500 2300 200 300 400 3000 -400
3100 100 3000 2600 400 300 400 3300 -200
3600 100 3500 2900 600 300 400 3600 0
4100 100 4000 3200 800 300 400 3900 200
4600 100 4500 3500 1000 300 400 4200 400
5100 100 5000 3800 1200 300 400 4500 600
PROBLEM 1.7
a) C = 100 + 0,75 * (1000-100) (put the value of Y & T in the equation of C)
C = 100 + 0,75 * 900
C = 775
At equilibrium
C+G+I = Y
775 + 200 + 150 = 1000
1125 = 1000 (here C+G+I not equal to Y, thus economy not in equilibrium)
As aggregate demand (C+G+I) is more than the aggregate supply (Y), Thus output
level should be increased to achieve the equilibrium in economy.
b) C = 200 + 0,90 * (5000 - 300) (Put the value of Y & T in the equation of C)
C = 200 + 0,90 * 4700
C = 4430
At equilibrium
C+G+I = Y
4430 + 500 + 400 = 5000
5530 = 5000 (here C+G+I not equal to Y, thus economy not in equilibrium)
As aggregate demand (C+G+I) is more than the aggregate supply (Y), Thus output
level should be increased to achieve the equilibrium in economy.
c) C = 150 + 0,5 * (2000 - 50) (Put the value of Y & T in the equation of C)
C = 150 + 0,5 * 1950
C = 1125
At equilibrium
C+G+I = Y
1125 + 150 + 150 = 2000
1425 = 2000 (here C+G+I not equal to Y, thus economy not in equilibrium)
As aggregate demand (C+G+I) is less than the aggregate supply (Y), Thus output
level should be decreased to achieve the equilibrium in economy.
d) C = 300 + 0,6 * (1600 - 100) (Put the value of Y & T in the equation of C)
C = 300 + 0,6 * 1500
C = 1200
At equilibrium
C+G+I = Y
1200 + 250 + 150 = 1600
1600 = 1600 (here C+G+I not equal to Y, thus economy not in equilibrium)
As aggregate demand (C+G+I) is equal to the aggregate supply (Y), Thus output
level should be remain same to achieve the equilibrium in economy.

Conclusion :

a) Output will need to increase

b) Output will need to increase
c) Output will need to decrease
d) Output level will remain same