(Solved): Which are the policy implications? 4. Consider the following linear version of the AADD model in ...

4. Consider the following linear version of the $AA-DD$ model in the text: Consumption is given by $C=(1-s)Y$, and the current account balance is given by $CA=aE-mY$. (In macroeconomics textbooks, $s$ 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 $Y=C+I+G+CA=(1-s)Y+I+G+aE-mY$. We will write the condition of money market equilibrium as $M^s/P=bY-dR$. 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 number is often called the open-economy government spending multiplier, but as you can see, it is relevant only under strict conditions.) Explain your result intuitively.