1i) What is cyclically adjusted budget deficit? - (5 marks)

ii) Assuming the UK economy taxes and government spending at equilibrium level of output for 2021 is each 7 trillion, use the cyclically adjusted budget deficit formula [() () [() ()] ( )] to work out questions 'a to d' below. (Hint: = taxes net of transfers; and alpha () = 1; consumption and investment are assumed unchanged):

(a) Derive and explain the kind of budget implemented by the UK government and by how much if actual output generated is 5.0 trillion (show all workings) - (10 marks)

(b) Derive and explain the kind of budget implemented by the UK government and by how much if actual output generated is 12.0trillion (show all workings) - (10 marks)

(iii) Use the 3-equation model to discuss whether contractionary fiscal policy should be used in the case where the UK economy is at an initial aggregate demand equilibrium (10 trillion), but in the last few months experienced a year-on-year positive shock (1.5 trillion) to aggregate demand from improved consumer confidence. (15 marks)