1. (20 points) The amount of goods that the U.S. economy imports might depend on the current state of the economy as well as on potential GDP: for example, when the economy is booming, imports usually rise. To incorporate this channel into the model, that a becomes:

a nY t

Assume the remainder of the model is unchanged from the original setup.

(a) Derive the IS curve for this new specification

(b) How and why does it differ from the original IS curve? (Hint: think about the slope and the impact of shocks.)