i) Y is real domestic output; ii) E is exchange rate in domestic currency/foreign currency terms, iii) if a government maintains a balanced budget, this implies that total government expenditure G is financed from government taxes T. G > T implies there is a government budget deficit.

a) Assume that Autaria has a law that requires its government to maintain a balanced budget at all times. Does this law imply that Autaria's government can no longer use a temporary increase in government spending to increase aggregate output in the short-run?

b) What is the effect of a permanent increase in government spending on aggregate output in the short-run? Explain with the help of a figure.