1. Suppose the economy reaches equilibrium GDP at $1,250,000 while potential GDP is at $1,500,000. Currently G=$180,000 while taxes are equal to 0.1Y (where Y is the same as real GDP).

1a. How large is the recessionary gap in this economy?

1b. At equilibrium GDP, is there a budget surplus or deficit? Solve for the value of this surplus or deficit.

1c. At the potential GDP, is there a surplus or deficit? Solve for the value of the full-employment surplus or deficit.

1d. Does there exist a cyclical surplus or deficit? Solve for its value.

2. Assume a given economy has an equilibrium GDP of $360 billion.

2a. If government spending and taxes both increase by $40 billion, determine the new equilibrium GDP.

2b. If both G and taxes increase by $40 billion, what impact will these two changes happening at the same time have on the budget? In other words, will these two changes cause a surplus, a deficit, or a balanced budget?

2c. Solve for the numerical value of the balanced budget multiplier.