Assume Country XYZ's banking system operates in a limited reserve framework. The economy is currently in long run equilibrium with a balanced budget, and inflation rate of 3%, and an unemployment rate of 4%. Nominal interest rate is 5%.

CONTINUE ON THE NEXT PAGE e. Show the impact of the fiscal policy action on a correctly labeled money market graph (remember that the government will need to use money to make more transactions). i. Label the original nominal interest rate in and the new nominal interest rate iz. (4 pts) ii. DESCRIBE the change. f. Suppose (in a limited reserves framework) the Federal Reserve decides to implement monetary policy to counteract inflation that occurred following the spending increase i. What open market operation would they need to implement? 1 pt ii. How would the policy action impact the money supply? 1pt ifi. What change in the discount rate would they use if they wanted it to be consistent with the open market operation? 1 pt g. Assuming a limited reserves framework, graph the impact of the monetary policy action on the money market graph in part e. i. Label the new interest rate is. 1 pt ii. DESCRIBE the combined impact of parts e and g (the fiscal and monetary policy) on nominal interest rates. 3 pts