Long Question 1: (70 points) Consider the short run model of Chapters 11 and 12. The national income identity is given by Y = Goth + G: + EX, - IM, (1) where Y, is real actual output, C is consumption, /, is investment, G, is government spending, EX s exports, and IM, is imports (all in period (). Assume that the "demand" variables are given by: C/ = ac (2) (3) EXi/y = dex (4) IM:/ = aim (5) It/ = a: - b(R, - F) (6) Where de , dy , dex , dim , di , g and b are given positive parameters. Moreover, Y, represents potential output,Y, is short-run output, R is the real interest rate, and f is the marginal product of capital or just the long run interest rate. ) Combine equations (2)-(6) with (1) to obtain the IS curve. This curve should have short run output on the left-hand side and the real interest rate on the right-hand side. Recall from the lectures hat we defined short run output as F = 4. In other words, short run output is the percentage difference of actual output from the potential. (15 points)c) Now assume due to a housing boom that a =0.4. 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 Y after the change in at. (15 points) b) Assume that a= 0.7, a,=0.1, dex=0.1, aim=0.1, a,=0.2, b=1.25, F = 0.05. Draw a graph with the IS and the MP curve in the long run. For the MP curve assume that the Fed just sets R equal to the MPK. Be sure to clearly label the points on the y-axis and x-axis where the curves cross. (10 points)