# ECO 2142 University of Ottawa Macroeconomic Theory I Questions Please follow the guideline and finish this assignment carefully. You have to write every qu

ECO 2142 University of Ottawa Macroeconomic Theory I Questions Please follow the guideline and finish this assignment carefully. You have to write every question on paper and upload PDF file. Legible writing Thx~ ECO 2142 – Macroeconomic Theory I

Department of Economics, University of Ottawa

Prof: Yazid Dissou

Assignment 2 – Online submission due for June 8, 2020, at 20:30

The system will not accept late submissions

Problem 1 (50 points)

In an imaginary open economy, we have the following information:

C = c 0 + c 1 (Y − T )

I = I

G=G

X=X

Q = q1 Y

T = t0 + t1 Y

Y, C, I, G, X, Q, are respectively income, consumption, investment, government spending, exports, and imports. c0 , c1 , q1 , t0 , and t1 are some positive parameters. c0 , t0 are the autonomous

components of, respectively, consumption and taxes. The real exchange rate is assumed to be

constant and equal to unity.

1. Find the expression of the equilibrium GDP in terms of c0 , c1 , q1 , t0 , t1 , I, X, and G. (5

points)

2. Calculate the equilibrium levels of GDP, consumption, imports and taxes, assuming the

following values for: c0 = 20, c1 = 0.8, q1 = 0.1, t0 = 50, t1 = 0.1, I =

150, ,X = 100 and G = 150. (6 points)

3. What are the equilibrium values of government and trade balances? (4 points)

4. Find the expression for the multiplier of government spending. (3 points)

5. Assume that the government wants to increase GDP by 100 by increasing it spending G.

(a) Calculate the change, ∆G, required to achieve that objective. (3 points)

(b) Find the new values of government and trade deficits. (3 points)

(c) How do they compare with the values obtained in Question (3) above? (3 points)

6. Instead of using its spending to achieve the same objective, the government wants now

to implement a policy that will increase exports, X.

(a) Calculate the change in exports, ∆X, required to achieve the objective. (3 points)

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(b) How does the required change in exports, ∆X, compare to the required change in

government spending, ∆G, found in Question (5) above? Explain! (3 points)

(c) Find the new values of government and trade deficits. (3 points)

(d) How do the latter compare with the values obtained in Question (5) above? Explain

intuitively the differences if there are any. (3 points)

7. Finally, the government is contemplating another alternative, i.e., changing its autonomous

taxes level, t0 , to achieve the same GDP target. Without calculating, you are asked to discuss:

(a) The required direction of change of the autonomous taxes, t0 (increase or decrease).

(3 points)

(b) The magnitude of the change in taxes, ∆t0 , compared to the one of government

spending, ∆G. Will they be equal? Why? (4 points)

(c) The impact of the change in t0 on government and trade deficits. (4 points)

Problem 2 (50 points)

Consider the following open economy (Home economy). The real exchange rate is fixed and

equal to one. Saving, investment, government spending, taxes, imports and exports are given

by:

S = −60 + 0.18Y

I = I

G = G

T = T0 + 0.1Y

Q = 0.1Y

X = 0.1Y ∗

where T0 is the level of autonomous taxes, and an asterisk is used to designate variables related

to the foreign economy.

1. Solve for equilibrium income in Home economy, in terms of I, G, T0 , and Y ∗ . (6 points)

2. Find the expression for government spending multiplier in Home economy? (5 points)

3. Assume Foreign economy has the same equations as Home economy. Moreover, use the

following values for the autonomous variables:

I = 300, G = 300, T0 = 100

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(a) Solve for the equilibrium values of income, Y, and Y ∗ in both economies. (5 points)

(b) Find the multiplier of government spending for each economy now? (4 points)

(c) Why is it different from the multiplier found above using the given values for the

autonomous variables? (4 points)

(d) Find the equilibrium values for government and trade deficits in each economy. (5

points)

4. Assume Home economy wants to increase GDP by 150.

(a) What is the necessary change, ∆G, assuming that Foreign economy does not change

its government spending to achieve the target output? (5 points)

(b) Solve for net exports and the budget deficit in each economy. How do they compare

to the values found in (3)? Discuss the difference if there is any. (5 points)

5. Assume now that both countries want to achieve the same increase in their GDP and they

want to coordinate their changes in government spending to achieve the target output.

(a) Find the required change in government spending in each economy. (5 points)

(b) Solve for net exports and the budget deficit in each economy. How do they compare

to the values found in (4)? Discuss the difference if there is any. (6 points)

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