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Output growth and inflation are lower than expected

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Reference no: EM132181419

(i) You hear a news report that output growth and inflation are lower than expected. How do you expect that report to affect interest rates? Explain why.

(ii) The Reserve Bank faces a large contractionary gap. How would you expect it to respond? Explain step by step how its policy change is likely to affect the economy. Use the AD-AS diagram to illustrate your answer.

Reference no: EM132181419

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