Q. Assume that you have following open economy where C = 10 + 0.8(Y-T); I = 10; G = 10; T = 10 and imports and exports are provided by IM = 0.3Y and X = 0.3Y* respectively where Y* is foreign output. Assume also that initially trade is balanced.

Then solve for equilibrium output in domestic economy Provided Y*. Illustrate what is multiplier effect for this open economy? Illustrate what happens to Y and trade balance over time if Y*'s economy grows faster than Y's economy. Assume domestic government has a target level of output of 125 and foreign country does not change G*, illustrate what increase in G is necessary to achieve target output in domestic economy? Illustrate what would be increase in G and T needed if government wanted to keep a balanced budget?