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 = −80 + 0.18Y
I = I
G = G
T = T0 + t1Y
Q = q1Y
X = x1Y∗

where T0 is the level of autonomous taxes, q1 and x1 are, respectively the marginal propensity to import, and export reaction to the foreign country’s income. An asterisk is used to designate variables related to the foreign economy.

1. Assuming that t1 = 0.1, and T0 = 100, find the values for the values of c0 and c1. (I cannot for the life of me figure out how to get the integer values for both C0 and C1 please assist)

2. Assume Foreign economy has the same equations as Home economy. Moreover, use the following values for the remaining autonomous variables: I = 500, G = 500. Use q1 = 0.1 and x1 = 0.1

(a) Solve for the equilibrium values of income, Y, and Y ∗ in both economies.

(b) Find the tax multiplier for each economy

Answer rating: 100% (QA)

1 Assuming that t1 01 and TO 100 find the values for the values of ... View the full answer