Assume that equilibrium real GDP in the economy is $800 billion, potential real GDP is $900 billion, the MPC of 0.8 and the MPI is 0.4. (assume economy is operating in the flat keynesian range of the AS curve).

A. What is the size of the GDP Gap?

B. How much must government spending increase to eliminate the GDP Gap?

C. How much must taxes fall to eliminate the GDP gap?

D. If government spending and taxes both change by the same amount, how much must they change to eliminate the GDP gap?

E. If the budget was balanced before both government spending and taxes changed as in (D.) above to eliminate the GDP gap, this change would create a ________ (budget deficit or surplus?) of $_______ billion.