Government follows an expansionary fiscal policy

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Reference no: EM131393460

Consider an economy where

C=200+0.25(Y-T)

I=150+0.25Y-1000i

G=250, T=200

(M/P)d=2Y-8000i

(M/P)s =1600

X = 0.3Y*, IM =0.2Y,

ε (real exchange rate) = 2, Y* is foreign output (Y*=900)

i) If government follows an expansionary fiscal policy and G changes by 60, calculate the change in Y for both the closed economy (?Yclosed) the open economy (?Yopen). Assume no change in the foreign output (Y*), Calculate the new trade balance.

ii) If this economy has flexible exchange rate regime, how would the exchange rate respond to a fiscal expansion policy? Appreciation or Depreciation? Explain why.

Reference no: EM131393460

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