Monetary Policy and GrowthExtra CreditDirections: Answer the following questions completely. Be sure to use graphs when asked orto explain your work and to explain completely any situation that asks for a reason.1.Interest rates in the country of Martinville are important to explaining economicactivity and changes in the economy.A) Using a correctly labeled graph of the money market, show how a decrease innominal GDP will affect the interest rate in Martinville. Is this interest ratenominal or real?B) Using a correctly labeled graph of the loanable funds market, show how a majorspending spree by those who were saving for the future will affect the interestrate. Is this interest rate nominal or real?C) Suppose the nominal interest rate has been 8 percent.a. If inflation is expected to be 5 percent what is the real interest rate?b. If deflation is expected to be 3 percent what is the real interest rate?D) The Central Bank of Martinville, known as The APEX buys bonds in the openmarket.a) What is the effect this will have on the ability of banks to make loans inMartinville? Why might The APEX do this?b) Show the effect of this action on the Money market, Investment Demand,Aggregate Expenditures and Aggregate Supply and Aggregate Demand.c) What will be the effect of this action on?i) the price levelii) the real rate of interestiii) Output and employment
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