Question
Suppose generous government stimulus has led a country's inflation level to be higher than desired, with an accompanying unemployment level that is lower than expected.
Suppose generous government stimulus has led a country's inflation level to be higher than desired, with an accompanying unemployment level that is lower than expected. The central bank decides that the economy is 'overheated' and attempts to use the appropriate monetary policy to deal with the situation. Describe, with the help of the appropriate figure, how a central bank might go about implementing such monetary policy, the subsequent effects this has on interest rates, the quantity of money in the market, and the process through which this effects the level of expenditure in the economy.
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