PART B: Long Questions Long Question 1: (70 points) Consider the short run model of Chapters 1 1 and 12. The national income identity is given by Yt = Ct + + Gt + EXt - IMt (1) where Yt is real actual output, Ct is consumption, It is investment, Gt is government spending, EXt is exports, and IM, is imports (all in period t). Assume that the "demand" variables are given by: Ct / = ac (2) Gt/ . = ag (3) EXty = dex ( 4 ) IMty = aim (5) "/. = at - b(Re - F) (6) Where ac , ag , dex , dim , di , g and b are given positive parameters. Moreover, Yt represents potential output, Y, is short-run output, R, is the real interest rate, and r is the marginal product of capital or just the long run interest rate. %8/12 2 Q 9 Rotate One Page BE Two Page . Continuous Reading Background . Translate Screen Grab . Compress Full Screen P e) Now make the following change to equation (6) above: 't/y = a; - b'(R. - F). Assume also that b' = .75. Continue to assume that that a;=0. Solve for the new IS curve. How does your answer to part d) change? (10 points)