Using the information given below, answer each question. All figures except parameters are in millions of dollars.
C=250+0.8YD, where 0.8 = b (or MPC)
T=50+0.2Y
I=230
G=270
X=220
M=120+0.15Y
a. Derive an algebraic expression for equilibrium output (Y) in terms of the variables and parameters.
b. Calculate the equilibrium level of real GDP
c. Calculate the size of the autonomous expenditure multiplier
d. Assume that the economy's full employment level of output is $1200m. Identify the type and compute the magnitude of the output gap persistent in this economy.
e. What policies would you recommend to eliminate the gap in (c) above? Give both the direction and magnitude of your policy options.