Ask Microeconomics Expert

Consider an open economy in which the real exchange rate is fixed and equal to one. Consumption, investment, government spending, and taxes are given by C = 10 + 0.8(Y-T), I = 10, G = 10, and T = 10 Imports and exports are given by IM = 0.3Y and X = 0.3Y* where Y* denotes foreign output.

a. Solve for equilibrium output in the domestic economy, given Y *. What is the multiplier in this economy? If we were to close the economy-so exports and imports were identically equal to zero-what would the multiplier be? Why would the multiplier be different in a closed economy?

b. Assume that the foreign economy is characterized by the same equations as the domestic economy (with asterisks reversed). Use the two sets of equations to solve for the equilibrium output of each country. [Hint: Use the equations for the foreign economy to solve for Y * as a function of Y and substitute this solution for Y * in part (a).] What is the multiplier for each country now? Why is it different from the open economy multiplier in part (a)?

c. Assume that the domestic government, G, has a target level of output of 125. Assuming that the foreign government does not change G*, what is the increase in G necessary to achieve the target output in the domestic economy? Solve for net exports and the budget deficit in each country.

d. Suppose each government has a target level of output of 125 and that each government increases government spending by the same amount. What is the common increase in G and G* necessary to achieve the target output in both countries? Solve for net exports and the budget deficit in each country.

e. Why is fiscal coordination, such as the common increase in G and G* in part (d), difficult to achieve in practice?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M940685

Have any Question?


Related Questions in Microeconomics

Question show the market for cigarettes in equilibrium

Question: Show the market for cigarettes in equilibrium, assuming that there are no laws banning smoking in public. Label the equilibrium private market price and quantity as Pm and Qm. Add whatever is needed to the mode ...

Question recycling is a relatively inexpensive solution to

Question: Recycling is a relatively inexpensive solution to much of the environmental contamination from plastics, glass, and other waste materials. Is it a sound policy to make it mandatory for everybody to recycle? The ...

Question consider two ways of protecting elephants from

Question: Consider two ways of protecting elephants from poachers in African countries. In one approach, the government sets up enormous national parks that have sufficient habitat for elephants to thrive and forbids all ...

Question suppose you want to put a dollar value on the

Question: Suppose you want to put a dollar value on the external costs of carbon emissions from a power plant. What information or data would you obtain to measure the external [not social] cost? The response must be typ ...

Question in the tradeoff between economic output and

Question: In the tradeoff between economic output and environmental protection, what do the combinations on the protection possibility curve represent? The response must be typed, single spaced, must be in times new roma ...

Question consider the case of global environmental problems

Question: Consider the case of global environmental problems that spill across international borders as a prisoner's dilemma of the sort studied in Monopolistic Competition and Oligopoly. Say that there are two countries ...

Question consider two approaches to reducing emissions of

Question: Consider two approaches to reducing emissions of CO2 into the environment from manufacturing industries in the United States. In the first approach, the U.S. government makes it a policy to use only predetermin ...

Question the state of colorado requires oil and gas

Question: The state of Colorado requires oil and gas companies who use fracking techniques to return the land to its original condition after the oil and gas extractions. Table 12.9 shows the total cost and total benefit ...

Question suppose a city releases 16 million gallons of raw

Question: Suppose a city releases 16 million gallons of raw sewage into a nearby lake. Table shows the total costs of cleaning up the sewage to different levels, together with the total benefits of doing so. (Benefits in ...

Question four firms called elm maple oak and cherry produce

Question: Four firms called Elm, Maple, Oak, and Cherry, produce wooden chairs. However, they also produce a great deal of garbage (a mixture of glue, varnish, sandpaper, and wood scraps). The first row of Table 12.6 sho ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As