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. Question 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 units and the trade balance will (increase/decrease) by units. Question 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 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 Question e): Please compare your answer in b) and d) regarding the equilibrium output and explain the difference
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.
Question 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 units
and the trade balance will (increase/decrease) by units.
Question 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
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
Question e): Please compare your answer in b) and d) regarding the equilibrium output and explain the
difference.
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