1. Consider the following open economy. C = Co+ G, (Y - T),C, >0 I = do + d, Y, d, >0 IM = m, YE, m, > 0 X = = -,X120 What is the relationship between export (import) and the real exchange rate, e, holding other things fixed? 2. What does the Marshall-Lerner condition tell you? Does this economy satisfy the condition? 3. In the class, we have learned: "The more open the economy, the smaller the effect of Fiscal policy on output." Suppose we want to see whether it is true or not in the given economy. Let's re-formulate the statement using the variables in this economy (Step 1) Define 'Openness' as (export + import )/GDP. Then, export + import * + m, VE ) x, Y' Openness = GDP E / Y + me For a given level of foreign income (Y*), real exchange rate(c), openness increases as m, (increases/decreases) So, instead we can check whether an increase in my decreases the effect of Fiscal policy on output or not. (step 2) Now let's check the effect of m, on the effect of Fiscal policy. First, derive the equilibrium output for this open economy. (with the multiplier and autonomous spending term). Assume 0