# MACROECONOMIC SOLUTION

2. Expert econometricians in the Republic of Yuck estimate the following:
Real GNP (Y)….. 200 Billion Yuck dollars
Planned investment spending … 75 Billion Yuck Dollars
Yuck is a simple economy with no government, no taxes and no imports or exports. Yuckers (citizens of Yuck are creatures of habit. They have a rule that everyone saves exactly 25 percent of income. Assume that planned investment is fixed and remains at 75 billion Yuck dollars.
You are asked by the business editor of the Weird Herald, the local newspaper, to predict the economic events of the next few months. By using the data given, can you make a forecast?
What is likely to happen to inventories? What is likely to happen to the level of real GDP? Is the economy at an equilibrium?
When will things stop changing?

1. You are appointed secretary of the treasury of a recently independent country called Rugaria. The currency of Rugaria is the lav. The new nation began fiscal operations this year, and the budget situation is that the government will spend 10 million lavs and taxes will be 9 million lavs. The 1-million-lav difference will be borrowed from the public by selling 10 yr government bonds paying 5% interest. The interest on the outstanding bonds must be added to spending each year, and we assume that additional taxes are raised to cover that interest. Assuming that the budget stays the same except for the interest on the debt for 10 years, what will be the accumulated debt? What will the size of the budget be after 10 years?

5. Expert economists in the economy of Yuk estimate the following.

Real output/income
1000
Government purchases
200
Total net taxes
200
Investment spending (planned)
100
Assume that the Yukkers consume 75% of their disposable incomes and save 25%
a. You are asked by the business editor of the Yuk Gazette to predict the events of the next few months. By using the data given, make a forecast. (assume that investment is constant)

b. If no changes were made, at what level of GDP (Y) would the economy of Yuk settle

c. Some local conservatives blame Yuk’s problems on the size of the government sector. They suggest cutting government purchases by 25 billion Yucks. What effect would such cuts have on the economy? (Be Specific.)