Consider the following economy:

C = 50 + 0.9YD

I = 200

G = 100

T = 100

NX = 0.05Y(star) 0.3Y + 100E

Y(star) = 13000 and

E = 1.3

Y is the foreign output and E is the exchange rate.

(a) Find the equilibrium level of output (Y ). What are the net exports (NX) in equilibrium?

(b) Suppose Y drops by 10% from 13000 to 11700. What is the new equilibrium level of output? What are the net exports in the new equilibrium?

(c) Suppose the government decides to counter the effects of the drop in Y(star) by increasing G. The goal is to get output back to its initial equilibrium level in part (a). By how much does the government need to increase G? What will be the net exports?

(d) Just like in part (c), suppose that the government decides to increase G to get output back to its initial equilibrium level in part (a). However, this time assume that when Y(star) drops to 11700, the exchange rate (E) depreciates to 1.5. By how much does the government need to increase G now? What will be the net exports?