Problem 1 At the beginning of 2022 you get an email - it turns out that the President of the (imaginary) country of Krakozhia got word of your exceptional perfor- mance in my class and decided to appoint you as the Chair and sole member of the Board of Governors of the Central Bank of Krakozhia (CBK). Being the zealous young economist that you are, you immediately accept the offer and get flown out to Krakozhia to begin your central banking career. You get settled into your new office at the CBK headquarters - as the sole member of the Board of Governors, you are now completely in charge of the country's monetary policy. A large team of Krakozhia's most capable PhD economists provides you with a variety of daily reports, updates, and forecasts that help you monitor current and expected developments within the economy. Let's see how things turn out under your leadership. . . Good luck! Part (a) (5 pts.) Fortunately, the previous Chair of CBK was an effective policymaker and left the economy in perfect condition. In fact, at the start of your term, output is at its potential level. However, a month or so into your term, your researchers approach you with some mixed news. You ask to hear the bad news first. The bad news: a minor bank panic is highly likely to occur soon due to one of the country's medium-sized commercial banks approaching insolvency. The good news: the Krakozhian banking sector is robust enough to handle the panic without destabilizing. Given the above information, you know you do not have to worry about financial stability. However, your EC370 senses tell you that the given event will affect the real economy somehow... How must you adjust your short-term monetary policy to maintain output at its potential level? In other words, how exactly should you carry out countercyclical monetary policy under the given circumstances? How will the inflation rate be affected? Use as many graphs as you can - the more the better. Hint: What exactly is a bank panic? How does it relate to liquidity preference theory? And how does it all then tie back in with the Aggregate Expenditure curve graph and the Phillips Curve graph

Really need help in graphing the answers? What happens on these curves? How is the economy affected? What monetary policy should I select?