Consider the following open economy (Home economy). The real exchange rate is fixed and equal to...

Consider the following open economy (Home economy). The real exchange rate is fixed and
equal to one. Saving, investment, government spending, taxes, imports and exports are given
by:
S = -60 + 0.18Y
I = I
G = G

T = T0 + 0.1Y
Q = 0.1Y
X = 0.1Y*
where T0 is the level of autonomous taxes, and an asterisk is used to designate variables related
to the foreign economy.

Assume Foreign economy has the same equations as Home economy. Moreover, use the
following values for the autonomous variables:
I = 300, G = 300, T0 = 100

(a) Solve for the equilibrium values of income, Y, and Y* in both economies. (5 points)
(b) Find the multiplier of government spending for each economy now? (4 points)
(c) Why is it different from the multiplier found above using the given values for the
autonomous variables? (4 points)
(d) Find the equilibrium values for government and trade deficits in each economy. (5
points)

Expert Solution

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Rahul Sunny answered 2 years ago

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