. The economy os described by the following equations:

C = 500 + 0.95Y_D

T = 0.2Y

I =400

G = 600

X = 200

IM = 0.16Y

1. Derive the equation for aggregate expenditure as a function of GDP (Y) and calculate equilibrium output

At the equilibrium level of output, calculate budget balance. Does the econmy have a budget surplus or a budget deficit?

What is potential output Y* at 4000. Does the ecomony have a recessionary gap or an inflationary gap? How big is the output gap?

Calculate z, the marginal propensity to spend out of national income, and calculate simple multiplier.

Using the multiplier, by how much would the economy need to change its government purchases in order to close the output gap?

If government purchases are changed as in (e), calculate the new budget balance. Does the economy have a budget surplus or a budget deficit?