1. The Dragonville's economy is currently experiencing an inflationary gap. The country's central bank is determined to help alleviate the problem.

A) Draw a correctly labeled aggregate demand-aggregate supply graph that illustrates Dragonville's current economy (4pts).

B) Name one action that the Dragonville central bank could take to alleviate the economy's problem (2pts).

C) Assume that the central bank enacts one of your policies above. Draw a correctly labeled money market graph showing the impact of the policy. Determine what happens to the following (5pts).

(i)Money Supply-

(ii) Interest Rates-

D) Indicate whether the interest rate you identified in c(ii) is a real or nominal rate (2pts)

Under what condition will the nominal interest rate differ from the real interest rate (2pts)?

E) On your graph in part (a) show the short-run effect of the central bank's policy on Dragonville's economy (2pts).

F) On a correctly labeled graph of the Phillips curve, show how the open-market operation will affect the following in the short run (5 pts).

Unemployment rate

Inflation rate