COVID-19 has brought several new very expensive stimulus packages by all the governments around the world. This may lead to a massive budget deficit for all the governments in the future. Central banks also reduced the interest rates to almost 0% in most developed countries. There is speculation that this will create high inflation in the near future.

1.What policy the central bank may take in the future to fight this inflation (Contractionary or Expansionary)? How would this change the short-term interest rates? Explain using the MS-MD curve what impact it will have on the amount of money in the economy and the short-term interest rates.2. Describe the channels with proper graphs by which this policy ripples through the economy and explain how each channel operates in theshort runandlong runto determine the interest rates, consumption, investment, trade balance, real GDP, and price level. Use SLF-DLF and AS-AD curve to explain your answers