6. Monetary policy a. Suppose that a country Homeland was initially at its long-run equilibrium with an inflation rate of 2% and unemployment rate of 6%. Then a collapse of the housing price struck. Explain how this event will affect inflation rate, unemployment rate and real GDP growth rate? b. Suppose that you were the head of the central bank and the target for the overnight rate was at 1% prior to the collapse of housing price. What new target for the overnight rate would you propose? Justify your choice. c. Explain how a central bank may use open market operation and the operating band to hit the new target for the overnight rate?

d. What economy wide ripple effects would you expect following your rate change? Explain in detail and in chronological order. Draw loanable funds market diagram and AS-AD diagram to support your reasoning. e. What are the hurdles you need to overcome for your rate cut to be successful? f. If you expect that the interest rate cut alone is not sufficient, propose another two remedies you may implement and explain how they may work.