Answer Happy

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.
Notes:
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 𝐺 is financed from government
taxes 𝑇. 𝐺 > 𝑇 implies there is a government budget deficit.