Consider two open economies, A and B, characterized by the equations on the right.

The parametersm₁ and x₁are the propensities to import and export. Assume that the real exchange rate is fixed at a value of 1 and treat foreign income, Y*, as fixed.Also assume that taxes are fixed and that government purchases are exogenous (i.e., decided by the government). We explore the effectiveness of changes in G under alternative assumptions about the propensity to import.

Given this information, which of the two economies do you think is larger?

A. A

B. B

C. A and B are likely to be equally large.

Suppose government purchases in each economy increase by one unit. (Assume the two economies do not trade with each other.)

Output in A will(fall/rise) by______.

Output in B will(fall/rise) by______.

Net exports in A will(fall/rise) by _______.

Net exports in B will(fall/rise) by _______.

Please reference the attached figure which is needed to solve the problem. Kindly answer all sections please and explain answers.

C = Co+c, (Y - T) 1 = do + dy IM = MY X = X Y * cy +dy =0.7 in both A and B my = 0.1 in A; my = 0.4 in B