Consider an economy described by the following equations:

Y = C + I + G

Yf = 73000

C = 2800 + 0.8 (Y - T)

I = 4200

G =8000

T = 1200

a) Calculate the short-run equilibrium output and the output gap. (3 marks)

b) If the government adopt fiscal policy to eliminate the output gap, how much

government spending have to change? Is it an increase or decrease in government

spending? (2 marks)

c) If the government adopt fiscal policy to eliminate the output gap, how much tax have to

change? Is it an increase or decrease in tax? (2 marks)

d) What type is the government fiscal policies as described in (b) and (c)? (1 mark)

e) Suggest two actions by central bank which may achieve the same impact as the fiscal

policies described in (b) and (c).