Consider an economy with the following characteristics (all variables measured in billions of dollars).

C = 120 + 0.4Yd

t = 0.25

I = 25

G = 100

X = 5

M = 0.1Y

where Yd is disposable income and t is the income tax rate.

(i) Find the equilibrium GDP.

(ii) At the equilibrium GDP, calculate the fiscal balance.

(iii) If the full employment GDP is $80 billion, is the economy experiencing a recessionary or inflationary gap? Explain your answer.

(iv) If the government wants to close the gap, should government expenditure (G) be increased or decreased? By how much?