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)

Solutions

Expert Solution

Please give ratings it will be appreciable thank you

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Consider the following open economy in which the real exchange rate is ﬁxed and equal to...

Consider the following open economy in which the real exchange rate is ﬁxed and equal to one. Saving, investment, government spending, taxes, imports and exports are given by: S = −156+0.18Y I = I and G = G (have a horizontal line at the top of two letters on the right side.) T = T0 +0.1Y Q = q1Y and X = X where T0 is the level of autonomous taxes, and q1 is the marginal propensity to import. Let...

Consider the following economy. Suppose the real exchange rate is fixed and equal to one. The...

Consider the following economy. Suppose the real exchange rate is fixed and equal to one. The consumption (C), investment (I), government spending (G), taxes (T), exports (X), and imports (Q) are given by: Z = C + I + G + (X – Q) C = 120 + 0.85(Y– T) I = 250 G = 600 X = 0.2Y* T = 50 + 0.25Y Q = 30 + 0.1Y where Y is the domestic income and Y* is the income...

Suppose a large open economy with fixed exchange rate.

Suppose a large open economy with fixed exchange rate.A. What happens to income, interest rate in response to a fiscal expansion?B. What happens to income and interest rate if the central bank expands money supply by buying bonds from the public?

Consider the case of a small open economy with a fixed exchange rate, perfect capital mobility...

Consider the case of a small open economy with a fixed exchange rate, perfect capital mobility (i.e., interest parity holds), and complete price stability (no ongoing inflation). Explain what effect a decrease in the world interest rate would have on the following domestic macroeconomic variables: a. The stock of foreign exchange reserves. b. The money supply. c. Real GDP. d. The price level. e. The real exchange rate.

Consider the determination of real exchange rates in a large open economy with a flexible exchange...

Consider the determination of real exchange rates in a large open economy with a flexible exchange rate regime. If today’s technology increase, e* will (increase/decrease/stay/none). If tomorrow’s technology is expected to improve, e* will (increase/decrease/stay/none) . If M decreases, e* will (increase/decrease/stay/none). If the government decreases G1 while keeps G2 unchanged, e* will (increase/decrease/stay/none),

Consider a small open economy that maintains a fixed exchange rate. Explain what effects a reduction...

Consider a small open economy that maintains a fixed exchange rate. Explain what effects a reduction in the interest rate that prevails in world financial markets would have on each of the following domestic variables after the economy has adjusted to a new equilibrium: (i) Real GDP (ii) Domestic interest rate (iii) Central bank’s stock of foreign exchange reserves (iv) Real exchange rate (v) Current and non-reserve financial accounts of the balance of payments

The small open economy of Hundred Acre Wood has a fixed exchange rate and is initially...

The small open economy of Hundred Acre Wood has a fixed exchange rate and is initially in short-run equilibrium. An outbreak of COVID-19 occurs and as a result money demand rises AND autonomous consumption falls. Suppose policy makers would like to keep fluctuations in the unemployment rate as small as possible, this implies the best policy reaction would be to: a) increase the money supply (only) b) Increase taxes (only) c) Increase the money supply, cut taxes and cut government...

Question