2. [Blanchard and Johnson (2015), p. 142, question 3] Consider the following open economy. The real exchange rate is xed and equal to one. Consumption, investment, government spending and taxes are given by: O = lU+D.3(YT), I = 10, G = 10 and T : 10. Imports and exports are given by: 0.31\" and U.3Y*, Q X 1where asterisk denotes a foreign variable. (b) Assume that the foreign economy has the same equations as the domestic economy (remove the asterisk from all the variables with an asterisk, and add an asterisk to all the variables without an asterisk). Use the two sets of equations to solve for the equilibrium income of each country. What is the multiplier for each country now? Why is it different from the open economy multiplier above?(d) 'What is the common increase in G necessary to achieve target output? Solution: The relevant equations are: 1" = 60 + 3.125G -| 1.8?5G\". 8 and Y\" = 61] + 3.125G* + 1.375G. Let G = G\" = G. Recall that the target level of Y is 125. Substitute G for both G and G\" and 125 for Y in the rst equation to get: 125 = 60 + 3.1256 + 1.3756; 125 = 60 + 3.125G + 1.875G 125 = 60 + 5G 5G = 125 - 60 5G = 65 G = 13. (e) Why is fiscal coordination, such as the common increase in G in (d), diffi- cult to achieve in practice