Macroeconomics

7. Multipliers, openness and fiscal policy Consider an open economy characterised by the following equations: C = Co + c(Y - T) I = do + djY IM = MY X =XY* The parameters m, and x1 are 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 pro- pensity to import. a. Write the equilibrium condition in the market for domestic goods and solve for Y. b. Suppose government purchases increase by one unit. What is the effect on output? (Assume that 0