1. Assume the following equations summarize the structure of an economy.

C= C_a + 0.7(Y - T)

C_a = 2,000 - 25r

T= 200 + 0.2Y

(M/P)^d = 0.3Y - 15r

M^S/P = 3,000

I_p = 3,500 - 20r+ .1y

G= 4,000 - .2y -15r

NX = 1,500 - 0.2Y

In response to the current budget deficit, the government cuts its expenditure by 100 billion dollars. How can the fed offset the decline in the real equilibrium output?

Make sure to support your answer with the relevant graph and the Fed's detailed policy.