Nepal can be described by the following equations; all amounts are in millions (m.) of Nepalese Rupees:

C = 80 + 0.9 Y_D

I = 500

G = 250

T = 20 + 0.2Y

Y_FE = 2500 (FE stands for full employment)

a. Calculate Eqm Y and graph it in Z-Y space. What type of "gap" does it have?

b. Use multiplier analysis to find the specific Rupee amounts of two different policies that Nepal's Parliament could enact, either one of which would get the economy to FE.

c. Explain why the Rupee amounts of your policies above differ by referring to the way in which each policy

works. What is the name of this type of policy? Show what each policy does to your graph of part a.

d. What if Nepal didn't have income taxes, that is, if its t₁=0 rather than 0.2? Explain why income taxes, t₁, are an "automatic stabilizer" by comparing the mathematical expression for the I multiplier in the case of T=t_o and T= t_o+t₁Y, as above.