In an imaginary open economy, we have the following information: C = c0 + c1(Y T) I = I G = G X = X Q = q1Y T = t0 + t1Y Y, C, I, G, X, Q, are respectively income, consumption, investment, government spending, exports, and imports. c0, c1, q1, t0, and t1 are some positive parameters. c0, t0 are the autonomous components of, respectively, consumption and taxes. The real exchange rate is assumed to be constant and equal to unity. 1. Find the expression of the equilibrium GDP in terms of c0, c1, q1, t0, t1, I, X, and G.

2. Calculate the equilibrium levels of GDP, consumption, imports and taxes, assuming the following values for: c0 = 20, c1 = 0.8, q1 = 0.1, t0 = 50, t1 = 0.1, I = 150, ,X = 100 and G = 150.

3. What are the equilibrium values of government and trade balances?

4. Find the expression for the multiplier of government spending.

5. Assume that the government wants to increase GDP by 100 by increasing it spending G. (a) Calculate the change, G, required to achieve that objective.

(b) Find the new values of government and trade deficits.

(c) How do they compare with the values obtained in Question (3) above?

6. Instead of using its spending to achieve the same objective, the government wants now to implement a policy that will increase exports, X.

(a) Calculate the change in exports, X, required to achieve the objective.

1 (b) How does the required change in exports, X, compare to the required change in government spending, G, found in Question (5) above? Explain! (3 points) (c) Find the new values of government and trade deficits.

(d) How do the latter compare with the values obtained in Question (5) above? Explain intuitively the differences if there are any.

7. Finally, the government is contemplating another alternative, i.e., changing its autonomous taxes level, t0, to achieve the same GDP target. Without calculating, you are asked to discuss: (a) The required direction of change of the autonomous taxes, t0 (increase or decrease). (b) The magnitude of the change in taxes, t0, compared to the one of government spending, G. Will they be equal? Why? (c) The impact of the change in t0 on government and trade deficits.