Assume the country of Hampsterland is currently at full employment.

(a) Assume that Hampsterland produces only cages and wheels. Draw a correctly labeled production possibilities curve for Hampsterland. Show a point that could represent the current output combination and label it A.

(b) Assume that the Central Bank of Hampsterland pursues a contractionary monetary policy.

(i) Identify the open-market operations that the Central Bank would use.

(ii) Draw a correctly labeled money market graph and show the short-run effect of the contractionary monetary policy on the nominal interest rate.

(iii) Assuming no change to the price level, what happens to the real interest rate because of the contractionary monetary policy? Explain.

(iv) Given your answer in part (b)(iii) regarding the real interest rate, what happens to the real gross domestic product (GDP) in the short run? Explain.