In class we have been assuming that all of government spending falls on domestic goods. Assume instead that a fraction falls on imports (such as capital equipment and military hardware): mg = marginal propensity to import out of government spending m = marginal propensity to import out of income Thus, Imports = IM+my+mgG The rest of the economy is as usual: C = C + CY I = I G = G TB EX-Imports Assume no capital flows, fixed prices, fixed exchange rate, and fixed interest rate. a) Solve for Y. b) What is the multiplier AY/A ? How does it compare to the regular multiplier (i.e., when mg = 0 )? What is the intuition? c) What is the effect on the trade balance ATB/AG? How does it compare to the usual effect on the trade balance (i.e., when mg = 0 )? What is the intuition?