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A6-11. Suppose a central bank decides it is appropriate to increase its policy interest rate in...

A6-11. Suppose a central bank decides it is appropriate to increase its policy interest rate in order to increase rates more generally throughout the economy. (a) Inthecontextofthemoneymarket,ifthemoneydemandfunctionisstable,explainhowthechangeinpolicy would be reflected in the money supply. [4] (b) Suppose the economy is a closed one. What effect will there be on investment, on aggregate expenditure? Include diagrams in your answer. [4] (c) What additional effect will there be on aggregate expenditure if the economy were an open one? [4] (d) How will aggregate demand be affected, whether we treat the economy as closed or open? Illustrate in a diagram. [4]

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Rahul Sunny answered 1 year ago
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