In this matter we will relax the hypothesis of small open economy. Specifically, the domestic country now affects the demand for goods from the foreign country, via its imports - which impact foreign exports, which again affect the demand for goods in the domestic country, and so on.

Suppose the consumption, imports and exports functions for the domestic country are given by:

C = c₀ + 0.6Y

IM = 0.4Y

X = 0.4Y*

In the foreign country, the structure is symmetrical:

C* = c₀ + 0.6Y*

IM* = 0.4Y*

X* = 0.4Y

Assume zero taxes in both countries. In addition, investment (I, I*) and government consumption (G, G*) in both countries are exogenous, and the real exchange rate is equal to 1.

What is the tax multiplier in the domestic country?