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. %VERSION B c) Now assume due to a housing crash that a;=0. First interpret this change in words. What kind of a shock is this? Then show how this changes your graph in part b). Finally, solve for the level of It after the change in aj. (15 points) - - + 67 % l backup on 7 5 44