1. Suppose you are given the following information about country X: equilibrium interbank interest rate (fed funds rate) = 5%, actual inflation rate = 12%, inflation rate target = 6%, potential GDP = $235 billion, actual GDP $230 billion. Use Taylor rule to calculate the interbank interest rate target for country X. 2A. Suppose the average interest in country A decreases. Assuming that money demand equal money supply, use the equation of exchange to show the impact of the interest rate decrease on the velocity of money for country A. You need to give a detailed explanation (not just increase or decrease). 2B. Suppose government spending in country X decreases. Explain the impact of this decrease on interest rate in country A. You need to give a detailed explanation (not just increase or decrease). 2C. Use your answers to 2A and 2B to explain the impact of a contractionary fiscal policy on country A's real GDP. You need to give a detailed explanation (not just increase or decrease).

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