Consider the economy of Chicken Republic which is characterized by the following equations: C = 10 + 0.8 (Y-T) 1 = 10 G = 10 T = 10 IM = 0.3 Y X = 0.3 Y* where everything is as previously denoted and Y* is the output of Duck Republic. a. Solve for equilibrium output in Chicken Republic, given Y*. What is the multiplier in this economy? If we were to close the economy - so both exports and imports are zero - what would multiplier be? Answer: Y = [ Select] In the open economy when Y* is fixed, the multiplier = [ Select] In the closed economy, the multiplier = [ Select] b. Assume Duck Republic is characterized by the same equations as Chicken Republic (with asterisks reversed). Use the two sets of equations to solve for the equilibrium output of each country. (Hint: Use the equations for Duck Rep to solved for Y* as a function of Y and substitute this solution for Y* in part (a).) What is the multiplier for each country now? Explain why the multipliers in those three cases are different. Answer: Because these two economies are identical, Y = Y* = [Select] Multiplier for the two economy = [Select ] The multiplier is higher than the open economy multiplier in part (a) because it takes into account the fact that an increase in domestic income leads to an increase in foreign income (as a result of an increase in domestic imports of foreign goods). The increase in foreign income leads to an increase in domestic exports. Consider the economy of Chicken Republic which is characterized by the following equations: C = 10 + 0.8 (Y-T) 1 = 10 G = 10 T = 10 IM = 0.3 Y X = 0.3 Y* where everything is as previously denoted and Y* is the output of Duck Republic. a. Solve for equilibrium output in Chicken Republic, given Y*. What is the multiplier in this economy? If we were to close the economy - so both exports and imports are zero - what would multiplier be? Answer: Y = [ Select] In the open economy when Y* is fixed, the multiplier = [ Select] In the closed economy, the multiplier = [ Select] b. Assume Duck Republic is characterized by the same equations as Chicken Republic (with asterisks reversed). Use the two sets of equations to solve for the equilibrium output of each country. (Hint: Use the equations for Duck Rep to solved for Y* as a function of Y and substitute this solution for Y* in part (a).) What is the multiplier for each country now? Explain why the multipliers in those three cases are different. Answer: Because these two economies are identical, Y = Y* = [Select] Multiplier for the two economy = [Select ] The multiplier is higher than the open economy multiplier in part (a) because it takes into account the fact that an increase in domestic income leads to an increase in foreign income (as a result of an increase in domestic imports of foreign goods). The increase in foreign income leads to an increase in domestic exports
