(a) Discuss the policy implications of the Quantity Theory of Money, the Liquidity Preference Theory and Friedman's Restatement of Quantity Theory of Money. (12 marks)

(b) Consider a closed economy in which the central bank chooses to target its interest rate. Suppose the economy is recovering fast from a recession and there are signs of inflation in the subsequent future. To pre-empt the inflation, the central bank decides to increase the interest rate gradually. Use the IS-LM-Yn diagram to describe and analyze the above events. (13 marks) (TOTAL: 25 marks)