You are given the following information about the economy in 2010 (all in billions of dollars):

Consumption function: C = 100 + (.8 Yd)

Taxes: T = -150 + (.25 Y)

Investment function: I = 60 Disposable income: Yd = Y - T Government spending: G = 80 Equilibrium: Y = C + I + G Hint: Deficit is D = G - T = G - [-150 + (.25 Y)].

a. Find equilibrium income. Show that the government budget deficit (the difference between government spending and tax revenues) is $5 billion.

b. Congress passes the Foghorn-Leghorn (F-L) amendment, which requires that the deficit be zero this year. If the budget adopted by Congress has a deficit that is larger than zero, the deficit target must be met by cutting spending. Suppose spending is cut by $5 billion (to $75 billion). What is the new value for equilibrium GDP? What is the new deficit? Explain carefully why the deficit is not zero.

c. Suppose the F-L amendment was not in effect and planned investment falls to I =