A town has three families, each with one child, and each of which earns $100,000 per year (pre-tax). Each family is taxed $10,000 per year to finance the public school system in the town, which any family can then freely attend. Education spending is $15,000 per student in the public schools. The three families differ in their preferences for education. Though families A and B both send their children to the public school, family B places a greater value on education than family A. Family C places the greatest relative value on education and sends its child to private school.

(a) Graph the budget constraint, making sure all relevant points are correctly labelled, and draw a possible indifference curve that corresponds to the choice each family makes, providing a brief explanation.

(b) The town is considering replacing its current system with a voucher system. Under the new system, each family would receive a $15,000 voucher for education to use in either public or private schools. The voucher system is more costly and taxes need to increase to $15,000 per household to pay for it. Draw the budget constraint the families would face under the voucher system and provide an explanation.

(c) Suppose that, when the new system is introduced, family A continues to send their child to public school, but family B now sends their child to private school (along with family C's child).

(i) Explain how you know that family C is made better off and family A is made worse off by the voucher policy. Provide also a graphical illustration. (ii) Show, using diagrams, that family B could be made better or worse off by the voucher policy.

(a) Complete the Table above (show the last column only) and determine the equilibrium real output of the private, open economy. Clearly show your steps and calculations. (b) If full-employment GDP for the open economy is $350 billion, will there be an inflationary expenditure gap or a recessionary expenditure gap in the economy? Why? Explain the consequence of this expenditure gap on the economy's real output and employment, if any. (c) Discuss the application of Keynesian macroeconomic theory to a major modern macroeconomic disturbance, such as the United States' Great Recession of 2007-2009. Your discussion should include the macroeconomic problems encountered and the Keynesian policies applied to address the problems.Exercise 1 (12 points) Using the macroeconomic model for a small open economy studied, analyze the impact of the following event on Canadian savings, investment, exchange rate and trade balance in the Canadian economy: event: in the U.S., the federal government ran very large budget deficits. Explain thoroughly with words + graphs.Figure 32-7 Refer to this diagram of the open-economy macroeconomic model of the Mexican economy to answer the questions below. A $1 $2 D1 I NCO1 NCO2 C Refer to Figure 32-7. Suppose that the Mexican economy starts at r2 and e3. Which of the following is consistent with the effects of capital flight?Question 2 (20 points) Chapters 4 & S Home is a small open economy with perfect capital mobility. Initially, it is in its long-run equilibrium and domestic and foreign nancial assets are perfect substitutes. Suppose that voters in a large open economy elect a controversial new president. But rather than uniting the people of that country, this president enacts and proposes to enact measures that polarize the citizens of that country. Some of these measures attempt to control or limit the entry of foreigners from certain countries and refugees (om anywhere) into the large open economy. Many believe that these (foreign) developments might have positive impacts on the economy (of the small open economy) and imagine that the positive impacts might include the following: 0 Make the (foreign) large open economy a less desirable location for investment capital. 0 Raise business confidence in the domestic (home) economy. a) Use the long-run classical model of an open economy to evaluate the impact of deploying this innovation (into space) on the Home country's output, consumption, investment, net exports, real exchange rate, and price level. Explain and support your answer by ONE loanable funds market diagram (for Home) and ONE foreign exchange market diagam. (15 points). b) Based on your answer in part (a), is there anything the central bank can to if it wants to offset the effect of the change in risk premium on the country's real interest rate? Explain. (5 points). Open Economy. (2 points) Suppose there are two large open economies in the World - the US and Japan. Suppose also that, unlike in the standard model for large open economies you saw in lectures, now savings in both countries are positively affected by the real interest rate. 1. (0.5 points) Assume that initially the US runs trade deficit, while Japan - trade sur- plus. Draw the graphs for these two large open economies and show the equilibrium world interest rate r as well as capital inflows and outflows for these economies. 2. (0.5 points) Now, assume that the chances of a military conflict in the East Asia in- creases and the Japanese government increases expenditures for national defense and directs these extra expenditures entirely on purchasing a ballistic missile de- fense system from the US. How will this affect the world interest rate r", capital flows between the US and Japan and the real exchange rate of Japan? Illustrate you answer with graphs