Economy with the following characteristics (measured in billions of $)

C= 40 + 0.9Yd

t=0.10

I=25

G=15

X=20

M=0.06Y

1.) Write down an expression for the aggregate expenditure function (AE)

2.) Find the equilibrium real GDP using algebra

3.) What is the value of the openeconomy multiplier?

4.) Suppose that the full employment GDP is $450 billion. Does the economy experience a recessionary or inflationary gap? What is the size of the gap?

5.) Suppose that government decides to close that gap by changing government expenditure (G). By how much should government expenditure be changes in order to close the gap? Illustrate the effect of this change in expenditure with the help of a diagram.

6.) At the new equilibrium real GDP, is the government budget in surplus or deficit? By how much?