What is the common increase in g required to reach

Reference no: EM133641209

Question: Consider the following open economy. The real exchange rate is fixed and equal to 1. The consumption, investment, government spending and taxes are given by:

C=10+0.8(Y-T); I=10; G=10; T=10.

Imports and exports are given by: IM=0.3Y; X=0.3Y* (asterisks indicate foreign variables).

1. Find the equilibrium income of the economy, given Y*. What is the multiplier in this economy? If it were necessary to close this economy (impose that imports and exports be zero), what would the multiplier be worth? Why are the multipliers different?

2. Suppose that the foreign economy is characterized by the same equations as the foreign economy considered) by reversing the asterisks and the absence of asterisks). Use both sets of equations to define equilibrium income for each country. What is now the multiplier of each country? Why is it different from the open economy in 1?

3. Let's imagine that both countries target an output (income) of 125. What is the increase of G necessary in each of these countries so that, assuming that the other country does not modify its public spending, they reach this target? Find the corresponding net exports and the budget deficit of each country.

4. What is the common increase in G required to reach the target product level?

5. Why is budgetary coordination as in 4 difficult to put in place in practical?

Reference no: EM133641209

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