Assume Yn = 11,600, t=0.2, and G = 2,610.

a) Conmpute the amount of taxes at natural real GDP.

b) Explain why there is a natural employment deficit. Compute the amount of the natural employment deficit in terms of both billions of dollars and as a percent of natural real GDP.

c) Suppose that the goal of fiscal policymakers is to reduce the size of the natural employment deficit to 1 percent of natural real GDP. Compute what the size of the natural employment deficit must be in terms of billions of dollars in order for fiscal policymakers to achieve their goal.

d) Given no change in the tax rate, compute by how much fiscal policymakers must cut government spending in order to accomplish their goal.

e) Given no change in government spending, compute by how much fiscal policymakers must increase the tax rate in order to accomplish their goal.

f) Given the objective of fiscal policymakers, explain what action monetary policymakers must take for the actions of fiscal policymakers to have no effect on real income.

g) Suppose that private saving increases as the interest rate increases. Given the fiscal-monetary policy mix describe in parts c-f, explain whether national saving increases by an amount that is larger than, equal to, or less than the decrease in the natrual employment deficit.

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