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Mathematical Economics 4. Consider the economy represented in Figre below. Suppose that a slight deflation is created by the monetary authority, so that the nominal

Mathematical Economics

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4. Consider the economy represented in Figre below. Suppose that a slight deflation is created by the monetary authority, so that the nominal rate of interest R falls below the real rate, r. Will this deflation improve welfare, under the assumptions made for Figure below, relative to the zero-ination steady state? What is the optimum rate of inflation? I\" 5 MW\

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