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

a) Assume that a country X has a law that requires its government to always maintain a balanced budget. Does this law imply that X 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 (for country X)? Explain with the help of a figure.

Please answer in detail