Consider the following open economy. The real exchange rate is fixed and equal to one. Consumption, investment, government spending, and taxes are given by: C = 8 + 0.6(Y - T), I = G = T = 0. Imports/ exports are given by: Q = 0.4Y, X = 0.4Y*, where an asterisk denotes a foreign variable. if the domestic government increases spending by 6 units as in b) and G=0 in the foreign country, the equilibrium output in the domestic country increases by units, and the trade balance in equilibrium is Now, suppose that the two countries coordinate in their fiscal policy. Both countries set a target level of output of 30 and agree to increase G at the same amount. The common increase in G necessary to achieve the target output is and the trade balance is
Consider the following open economy. The real exchange rate is fixed and equal to one. Consumption,
investment, government spending, and taxes are given by:
C = 8 + 0.6(Y - T), I = G = T = 0.
Imports/ exports are given by:
Q = 0.4Y, X = 0.4Y*,
where an asterisk denotes a foreign variable.
if the domestic government increases spending by 6 units as in b) and G=0
in the foreign country, the equilibrium output in the domestic country increases by
units, and the trade balance in equilibrium is
Now, suppose that the two countries coordinate in their fiscal policy. Both countries set a
target level of output of 30 and agree to increase G at the same amount. The common increase in G
necessary to achieve the target output is and the trade balance is
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