2. Suppose that there is a wave of pessimism in the economy due to Covid-19 and, as a result, the economy is operating below its natural level of output with high unemployment and low inflation. So, the central bank decides to stimulate the economy. Assume a small open economy with perfect capital mobility and a flexible exchange rate system. (Total marks = 20) a) (i) Should the central bank increase or decrease the money supply if it wants to stimulate the economy? Explain. (1 mark)

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To stimulate the economy when its operating below its natural level of output with high unemployment ... View the full answer