Reference no: EM132479163

The following equations describe the domestic economy: 

C = 0.75Y

I = 25 

G = 0

X = 0.025Y*

Q = 0.25Y 

And the following equations describe the foreign economy: 

C* =0.75Y*

I*=250 

G*= 0

X*=0.25(Y +500)

Q*=0.15Y*

Suppose the real exchange rates in both economies are fixe and equal to one.

1. Find equilibrium Y and Y*
2. Suppose that the domestic economy experiences a 20% drop in investment from 25 to 20. Find the percentage decreases in equilibrium Y and Y*.
3. Suppose that foreign economy experiences a 20% drop in investment from 250 to 200. Domestic investment remains at 25. Find the percentage decreases in equilibrium Y and Y*. 
4. Think of Canada as the domestic economy and the US as the foreign economy. Compare the results that you obtained in parts (2) and (3) above.