Consider an open economy in which the real exchange rate is fixed and equal to one. Consumption, investment, government spending, and taxes are given by C = 10 + 0.8(Y T), I = 10, G = 10 and T = 10 . Imports and exports are given by IM = 0.3Y and X = 0.3Y* where Y* denotes foreign output.

Assume that the foreign economy is characterized by the same equations as the domestic economy (with asterisks reversed). Use the two sets of equations to solve for the equilibrium output of each country.

What is the multiplier for each country now? Why is it different from the open economy multiplier in part (a)?