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The economy is in a recessionary gap.
a) Describe the appropriate monetary policy and the steps the Bank of Canada takes.
ANSWER: Monetary policy that lowers the interest rates and stimulates the borrowing
b) Draw the AS-AD model, starting in a recessionary gap. Show the effect of the appropriate monetary policy on the diagram. What happens to real GDP, unemployment, and inflation?
c) As a result of the monetary policy, do unemployment and inflation move in the same direction or opposite directions?
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