1. Two years later, the Baconia central bank hires you as an economic consultant and has provided you with these statistics on the current economic conditions:

Real GDP = $11.1 trillion

Inflation rate = 3.1%

The BBEA and central bank have determined the following values:

Real potential GDP = $10.6 trillion

Target (or desired) inflation rate = 2.5%

a. What would you recommend the central bank do in terms of its open market operations to bring its economy toward full employment?

b. What would you recommend the central bank do to its discount rate to bring its economy toward full employment?

c. In the long run, if the velocity of money and growth of real output are relatively stable, and if the central bank pursues your recommended policies, what will likely happen to the price level in Baconia?