Question: Suppose a central bank decides to decrease its policy interest rate in an effort to decrease interest rates throughout the economy. How will aggregate demand

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

  1. How will aggregate demand be affected, whether we treat the economy as closed or open? (Illustrate in a diagram.) Under what circumstances would this policy be appropriate for a central bank that was trying to stabilize the economy? (Illustrate in your diagram.) [5]

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