Exercise 1: Attempt the following questions. Justify your answers. a. During a depression, there is excess supply of every product. Normally, the market for a product in excess supply would achieve equilibrium again through a change in the price of the product. Accordingly, would the economy recover from the depression such that the markets of all products return to equilibrium, real GDP return to its full employment level by appropriate changes in the price of every product and a change in the nominal wage of every worker resulting in either a positive or a negative inflation rate? The following questions in this exercise are independent of the previous question. b. Suppose that the actual inflation rate is 5%. If the expected inflation rate is 2%, and the nominal interest rate is 5%, what is the expected real interest rate? In the rest of this exercise, suppose that the velocity of money is constant, the expected real interest rate is 1%, and the expected inflation rate is always equal to the actual inflation rate thanks to the free availability of perfect information. c. When the growth rate of money supply is 4% and the growth rate of real GDP is 2%, what is the nominal interest rate? d. Let the growth rate of money supply fall from 4% to 2% without affecting the growth rate of real GDP or the velocity of money. What happens to the actual inflation rate? What happens to the nominal interest rate? e. Define the term open market operation. In the previous question, has the decrease in the growth rate of money supply been generated by an open market operation conducted by the central bank and if so which one