QUESTION 1

Intl. Macro.

There are two attachments. This is the complete question.

1. Open economy model 2 large countries A and B A's economy is characterized by the following equations. C=3o+.8(YT) I=2o G=2o T=2o X=1o+.2Y* IM=1o+.2Y B's economy is symmetrical (replace the variables without star by variables with stars and vice-versa) Set up the equilibrium relation for each country in the YY* space i.e. Y = fang equation 1 and Y* = f(Y) as equation 2 Y = _L1) Y*= (2) Solve the system of equations to derive the joint equilibrium values of Y and Y* Y: Y*= Show the 2 relations (1) and (2) on the graph below and report the joint equilibrium show the values of the intercepts and slopes. Ya: Now assume that country B raises tax by 10: show the impact on the graph. Will equilibrium Y increase or stay the same or demase Will equilibrium Y* increase or stay the same or decrease Recalculate the following equations: Y = J) Y*=(2) Solve the system of equations to derive the joint equilibrium values of Y and Y* Y: Y*= Y and Y* were originally equal since the model was symmetrical. What can you say now about the new equilibria Y' amLYL is Y'>Y*' or Y'=Y*' or Y'