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 117118, Questions 1, 3, and 4.
Chapter 7, Pages 135136, 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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 Spring '10
 MasoudAnjamshoa
 Macroeconomics, International Trade, budget deficit

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