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. 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 _____. b. 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 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 _____. c. Please compare answer a) and b) 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
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 _____.
b. 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 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 _____.
c. Please compare answer a) and b) regarding the equilibrium output and explain the difference.
Trending now
This is a popular solution!
Step by step
Solved in 6 steps