Consider an open economy characterized by the equations below. C=Co+C1(Y-T) I=do+d1Y IM=m1Y x=X1y* The parameters m1 and X1 are the propensites to import and export. Assume that the real exchange rate is fixed at a value of 1 and treat foreign income Y* as fixed. Also that taxes are fixed and that government purchases are exogenous (i.e. decided by the government). We explore the effectiveness of changes in G under alternative assumptions about the propensity to import.
QA: Write the equilibrum condition in the market for domestic goods and solve for Y.
QB:Suppose govermnet purchases increase by one unit. What is the effect on output? (Assume that 0)