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Please explain the answer and the diagram well and step by step, thanks ! Consider a closed economy described by the following set of equations:

Please explain the answer and the diagram well and step by step, thanks !

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Consider a closed economy described by the following set of equations: Y = C(Y, Ye, i 1:9,A) + I(Y",i 119,10, Suppose that 1r\" 2 11'_1 and there are no cost-push shocks and the Phillips curve is 11} = Tl'_1 + YtY" B Yn ' In period zero, the interest rate is to inflation is no and there is no output gap. From period 1 onwards, the central bank tries to keep production at a level Y+ where Y+ > Y". What does the central bank do to keep production on this level? What happens to inflation, expected inflation, and the nominal interest rate in periods 1 and 2? Illustrate how the Phillips and IS curves shift over time. In period 1, the central bank sets a lower interest rate to increase aggregate demand. Production increases above the natural level and inflation increases. Since expectations are based on previously observed inflation, the Phillips curve and the IS curve will both shift up in period 2, so to keep production at Y+ (but, importantly, no higher than Y+), the central bank must raise the nominal interest rate in that period. Still inflation will continue to increase because production is above the natural level. A permanent inflationary spiral must be maintained to keep output above Y". -. Yn io N. IS Y PC Y Y+

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