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Consider the following context in which there are two countries, Home and Foreign: (For- eignveriables are starred). Assume that both countries use the same currency,
Consider the following context in which there are two countries, Home and Foreign: (For- eignveriables are starred). Assume that both countries use the same currency, i.e., the real exchange rate is fixed and normalized to one. Prices are also assumed to be constant. C = 145+0.65(Y - T) I = 135 G = 135 T = 100 Q = 0.15Y X = 0.15Y* C is consumption spending, I is investment spending, G is government spending, T is Taxes, Q is Imports, and X is exports. 4. Assume now that the level of investment is positively related to the level of income i both countries as opposed to being exogenous, like in the previous case. With no calcu lation, compare the magnitude of the common level of government spending required to achieve the desired level of output with the one found in the previous question? Explai your response. (7 points)
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