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Due in less than 5 hours. 15:00 CET.
Size: 1 page writing (maximum) + figures.
Suppose we are in a situation where we have very low unemployment, and we are close to maximum capacity. The central bank is concerned about inflation, reducing the monetary base by increasing the rate that banks deposits with the central bank. You should examine what consequences this has for the national economy. The work requirement is to answer the questions below.
a) Explain and show in a figure what happens to interest rates when the monetary base decreases.
b) Use the answer in a: argument for what will happen with fixed investment (I).
c) Use the answer you get in b: show mathematically and explain what happens to the consumer (C) domestic product (R), and savings. Here you can assume that export (A), imports (B), and public consumption (G) does not change. You can also set the marginal consumption propensity (a) to be 0.8. Changes in Investments (I) is either 2 billion up or down (whether (I) goes up or down you will have arrived to in task b)
d) Why is it really unrealistic to expect that imports and exports do not change, as we assume in task c?
e) Use your answer from c about change in R: Explain and show in a figure how you expect this will affect the nations export of goods.
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