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Short Question 3: (20 points) Consider the following GDP equation, consumption function, exports function. imports function and investment function and use them to answer the
Short Question 3: (20 points) Consider the following GDP equation, consumption function, exports function. imports function and investment function and use them to answer the following questions KZCt'i-It-l-Gt-l-ExtIMt %=c'zi-5(Rtf); 13>0 C=acY2 G=agl EX=ath IM=aith A) Write down the formula that denes short-run output 17; in terms of actual output Yt and potential output K. ( 5 points) B) Derive the IS curve as a relation between short run output Y; and the real interest rate gap Rt F. You should show all the steps. (8 points) C) The US Congress is working on passing President Biden's $1.9 trillion covid relief bill. Out of this $ 325 billion worth of expenditure is in supposed to be in terms of public in- frastructure projects. This amount is 1.5% of potential GDP. That is Eng would increase by 0.015 if this package were to pass the Congress. Assume Ricardian equivalence does not hold and that the government nances this expenditure by borrowing, and not through taxes in the short-run. Show graphically how does this change in Fig affect the IS curve. What would happen to short-run output in this model if fig increases by 0.015, keeping xed real interest rate Rt? Is there a multiplier in this model? Explain why or why not? (7 points) Congress is working on a proposal to send $520 billion in direct $ 1400 checks to households. Based on the information presented in part C), calculate the size of this package as a percentage of potential output
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