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Suppose the money market for the country of Pawnee can be represented by the following demand and supply equations, where the quantity of money is
Suppose the money market for the country of Pawnee can be represented by the following demand and supply equations, where the quantity of money is measured in millions of dollars: Supply Qn=70-2r a. Calculate the equilibrium interest rate, showing all necessary work. Graph the money market in the area provided below, being sure to properly label axes, curves, y-intercepts, and equilibrium. (2 points) b. Suppose that currently, the Pawnee economy is experiencing a recessionary output gap. Sketch the current state of the economy on the graph on the next page using the model of aggregate supply and aggregate demand, being sure to label a|| axes, curves, important points, and output gap. (1 points) C. Suppose that Ben Wyatt, president of the Central Bank of Pawnee has decided to perform open market operations to eliminate the output gap. What type of open market operation should Ben Wyatt perform? (1 points) What are the two other policy tools the Central Bank of Pawnee could use to achieve their goal of eliminating the output gap? Please specify the direction of any changes. (1 points) Assume that in order to close the output gap, the Central Bank of Pawnee has decided they need to set a target interest rate of 5%. If the reserve ratio in Pawnee is 10%, there is no currency drain, and banks do not hold excess reserves, what should the amount of the open market operation be? (1 points)
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