Tatra's economy is characterized by the following equations. Consumption: C = 50 + 0.9(Y-T) Investment: I = 50 Government spending: G = 110 Tax: T = 100 Export: X = 400 Import: M = 40 + 0.3 Y Case I. Tatra is a small open economy under xed exchange rates that sterih'zes and prohibits capital ows. a. Derive the equation for SN-I b. Derive the equation for X-M c. Use these 2 equations to determine equilibrium Y Y= Calculate the balance of trade and government saving(sign): TB= SE = Show your results on the graph below: draw the XM and the SN-I lines. Name the axes. Show the balance of trade and equilibrium income Y0. Report the equilibrium value of income and the value of the corresponding balance of trade. b. As Tatra suffers from a budget imbalance (deficits or surplus?), its government decides to use fiscal policy (G) to correct the problem. Does the government increase or cut G? to achieve this goal. 5 Econ 472 Assign#2 By how much? Analyze the impact on output (hint: you can use the open economy multiplier) and on the balance of trade. Will output increase or decrease? Calculate the change (sign) {you can use the multiplier}: AY1= Will the balance of trade go into deficit or surplus? Calculate the change (sign): ABT1= Show on the graph the impact of the government's action to balance its budget (draw the appropriate lines) and show Y1 Case II Tatra is a small open economy under flexible exchange (with no autonomous capital flows) a. All the equations are the same as above. The initial balance of trade and budget deficit are the same as above.Calculate the change (sign) {you can use the multiplier} : AY= Will the balance of trade go into deficit or surplus? Calculate the change (sign): ABT1 Show on the graph the impact of the government's action to balance its budget (draw the appropriate lines) and show Y1 Case II Tatra is a small open economy under flexible exchange (with no autonomous capital flows) a. All the equations are the same as above. The initial balance of trade and budget deficit are the same as above. b. As Tatra suffers from a budget imbalance its government decides to use fiscal policy (G) to correct the problem. Does the government increase or cut G? to achieve this goal. By how much? What is the new equation (if any) for SN- I With flexible exchange rates, analyze the impact on output and on the balance of trade. Will output increase or decrease? What is the final level of output Y? Y= What happens to the exchange rate? What is the new balance of trade BT1= Show on the graph below the impact of the government's action to balance its budget under flexible exchange rates. Draw the appropriate shifts of the lines, SN - I and X - M, (if any) and show the final level of Y and the final balance of trade