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# ps07 - University of Toronto Economics Department...

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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. ----------------------------------------------------------------------------------------------------------------------------------- 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.

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ps07 - University of Toronto Economics Department...

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