Consumption is given by C = MS 7.- [20 points] Consider the following linear version of the AA-DD model: = (1 − s)Y and

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Consumption Is Given By C Ms 7 20 Points Consider The Following Linear Version Of The Aa Dd Model 1 S Y And 1 (132.06 KiB) Viewed 9 times

Consumption is given by C = MS 7.- [20 points] Consider the following linear version of the AA-DD model: = (1 − s)Y and the current account balance is given by CA = aE - mY (where s is sometimes referred to as the marginal propensity to save and m is called the marginal propensity to import.) Then the condition of equilibrium in the goods market is Y = C + I + G + CA = (1 − s)Y + I + G + aEmy. We will write the condition of money market equilibrium as = by dR. On the assumption that the central bank can hold both the interest rate R and the exchange rate E constant, and assuming that investment I also is constant, what is the effect of an increase in government spending G on output Y? (This is number is often called the open-economy government spending multiplier). Explain your results intuitively. P