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 a. Suppose that the domestic country takes foreign income Y* as given. The equilibrium output in the domestic economy is? b. Following a), if the domestic government increases spending by 6 units (i.e., G increases from 0 to 6), the equilibrium output in the domestic country will increase by ____. and the trade balance will ________ (increase/decrease) by _____. c. Assume the foreign economy has the same equations as the domestic economy. Both governments consider the impact of the other country on the domestic economy. If G=0, then the equilibrium output in both countries 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
a. Suppose that the domestic country takes foreign income Y* as given. The equilibrium output in the domestic economy is?
b. Following a), if the domestic government increases spending by 6 units (i.e., G increases from 0 to 6), the equilibrium output in the domestic country will increase by ____. and the trade balance will ________ (increase/decrease) by _____.
c. Assume the foreign economy has the same equations as the domestic economy. Both governments consider the impact of the other country on the domestic economy. If G=0, then the equilibrium output in both countries is ______ and the trade balance is ______.
d. Following c), 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 _____.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
