Goods market in an open economy. Consider the following open economy. The real exchange rate is...
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Goods market in an open economy. Consider the following open economy. The real exchange rate is fixed and equal to 1. Consumption is given by C= 100+ 0.5(Y-T), investment is I = 50, taxes are T = 10, and government spending is G = 15. Imports and exports are given by IM= 0.1Y and X 0.02Y where Y* is foreign GDP. = (a) Solve for the equilibrium Y in the domestic economy for any given Y*. (2 points) (b) What is the multiplier in this economy? If we were to close the economy- so exports and imports were identically zero - what would the multiplier be? Why are the open and closed economy multipliers different? (1 point) (c) Assume that foreign GDP is 5 times as large as domestic GDP. What is the equilibrium value of domestic GDP Y? If the foreign economy experiences a boom and its GDP increases by 10%, what is the new equilibrium value of domestic GDP Y? (1 point) (d) Suppose that the foreign economy wants to improve its trade balance by imposing tariffs on its imports. This change of trade policy leads to a decline of foreign demand for domestic goods. In particular, X= 0.01Y". With this new export demand, solve for the equilibrium values of domestic GDP Y and foreign GDP Y* assuming again foreign GDP is 5 times as large as domestic GDP. How does the trade protection by the foreign economy affect domestic and foreign GDP? Explain. (1 point) Goods market in an open economy. Consider the following open economy. The real exchange rate is fixed and equal to 1. Consumption is given by C= 100+ 0.5(Y-T), investment is I = 50, taxes are T = 10, and government spending is G = 15. Imports and exports are given by IM= 0.1Y and X 0.02Y where Y* is foreign GDP. = (a) Solve for the equilibrium Y in the domestic economy for any given Y*. (2 points) (b) What is the multiplier in this economy? If we were to close the economy- so exports and imports were identically zero - what would the multiplier be? Why are the open and closed economy multipliers different? (1 point) (c) Assume that foreign GDP is 5 times as large as domestic GDP. What is the equilibrium value of domestic GDP Y? If the foreign economy experiences a boom and its GDP increases by 10%, what is the new equilibrium value of domestic GDP Y? (1 point) (d) Suppose that the foreign economy wants to improve its trade balance by imposing tariffs on its imports. This change of trade policy leads to a decline of foreign demand for domestic goods. In particular, X= 0.01Y". With this new export demand, solve for the equilibrium values of domestic GDP Y and foreign GDP Y* assuming again foreign GDP is 5 times as large as domestic GDP. How does the trade protection by the foreign economy affect domestic and foreign GDP? Explain. (1 point)
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Answer rating: 100% (QA)
a To find the equilibrium output Y in the domestic economy we need to equate aggregate demand AD with aggregate supply AS In an open economy AD is given by AD C I G X IM Given that C 100 05Y T I 50 T ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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