assume that a central bank wants to keep the interest rate at a target of 2%. For the past quarter the interest rate has been stable at the target rate. However, due to a fear of competition from foreign producers, the government chooses to place restrictions on the number of imports coming into the economy.

Assume that i) both the goods market and market for real money balances begin in equilibrium ii) the central bank cannot change either the refinancing (repo) rate or reserve requirements and iii) that all securities are held by the central bank or the commercial banking sector.

a) With references to the IS-LM model, show and/or describe in detail the effects of the import restrictions.

b) With references to the IS-LM model and the Central Bank's balance sheet, what should the Central Bank do to maintain interest rates at the target level, following the government's decision? Show and/or describe in detail how this policy will affect the interest rate and level of output in the economy.