Question: Suppose a central bank decides to decrease its policy interest rate in an effort to decrease interest rates throughout the economy. (a) Using a diagram

Suppose a central bank decides to decrease its policy interest rate in an effort to decrease interest rates throughout the economy.

  1. (a) Using a diagram for the money market, explain the effects of the decision on interest rates and how the central bank must respond to support this policy decision. [Hint: make sure to discuss the adjustment to the new equilibrium in the money market.] [5]

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