Question
Consider the following open economy. The real exchange rate is fixed and equal to one. Consumption, investment, government spending, and taxes are given by: C
Consider the following open economy. 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
T = 10
Imports and exports are given by:
Q = 0.3 Y X = 0.3 Y*
where an asterisk denotes a foreign variable.
b) Assume the foreign economy has the same equations as the domestic economy
(remove the asterisk from all the variables with an asterisk and add a
n asterisk to all the
variables without an asterisk). Use the two sets of equations to solve for the equilibrium
income of each country.
Y = 44 + 0.6Y*
and
Y* = 44 +0.6Y
they say to calculate the new multiplier
The answer says the multiplier is calculated as: [1/(1-0.8-0.3*0.6 +0.3)]=3.125 WHY and How did they get here?
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