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)
a. Calculate the multiplier if the economy is closed and the multiplier if the economy opens up. Explain the economic intuition why two are different with 3-5 sentences.
b. Solve for the equilibrium level of income (Y) for the open economy (Yopen) and calculate the trade balance (NX).
c. Solve for the equilibrium level of interest rate for the open economy (iopen).
d. 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.
e. If this economy has flexible exchange rate regime, how would the exchange rate respond to a fiscal expansion policy? Appreciation or Depreciation? Explain why.