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Question 1 Suppose a country is facing an inflationary gap, and the Central wants to use monetary policy to stabilize the economy and reduce inflation.

Question 1

Suppose a country is facing an inflationary gap, and the Central wants to use monetary policy to stabilize the economy and reduce inflation. What kind of policy should it follow? How will it impact bond prices, interest rates, investment, the exchange rate, net exports, real GDP, and the price level. Illustrate your analysis graphically with explanations.

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