University of Toronto
Macroeconomics, Theory and policy
Masoud Anjomshoa
Economics Department
Assignment #7
Olivier Blanchard, David Johnson, Macroeconomics, Third Canadian Edition (2007).
Chapter 6, Pages 117-118, Questions 1, 3, and 4.
Chapter 7, Pages 135-136, Question 2.
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1-
Coordination and Fiscal policy:
Suppose C=c0 + c1 (Y– T), Q=qY, and X=xY*.
Also, I=Io, G=G, and T=To are fixed values.
Real exchange
rate is fixed and
ε
=1.
The parameters q is the marginal propensity to import.
i)- Solve for the equilibrium output given the foreign country output.
Find the open economy multiplier, and
compare it with the closed economy multiplier, where x=q=0.
Is it larger or smaller? Why?
ii)- Suppose there is a foreign country with these specifications: C*=c0 + c1 (Y*– T*), Q*=qY*, and X*=xY.
Also. I*=Io, G*=G*, and T*=To are fixed values.
Solve for the equilibrium output in the foreign country, given
the domestic country output.
Find the open economy multiplier for the foreign country.
iii)- Find the equilibrium output of each of these two countries, in terms of exogenous variables: c0, c1, To, q, x,
Io, G, and G*.
iv)- Suppose the domestic country wants to increase its output by N units.