Consider the following open economy.

= + ( ), > 0

= +, > 0

= , > 0

=(*/), > 0

1) What is the relationship between export (import) and the real exchange rate, , holding other things fixed?

2) What does the Marshall-Lerner condition tell you? Does this economy satisfy the condition?

= ( +)/ = [(₁*)/(/)]+ ₁

3) For a given level of foreign income (Y*), real exchange rate(), openness increases as 1 (increases/decreases)-> choose one

4) Consider the following two economies (economy A and B) ₁ () = 0.1, ₁ () = 0.5. Besides this, both economies are characterized by ₁ + ₁ = 0.6, = 1, _{0 1} + ₀ + = 240, ₁ = 0.2, * = 300. Draw the graphs of goods market and net export for each country.