4. (10) The foreign and domestic economies are initially at potential

GDP. The domestic economy is small and the foreign economy is large. The

exchange rate is floating and capital is perfectly mobile. Assume a Keynesian

model so that adjustment to any shock is lagged. Using the AD-AS model

analyze the short run impact on domestic

X

M, I, C, Y, P

and

E

for the

following shock:

Environmental toxins discharged into water result in 15 percent

of domestic farmland being rendered useless for cultivation