QUESTION 3 (20 MARKS)
Automatic adjustment and policy implementation can be applied to overcome internal and external disequilibrium in a country that adopts fixed exchange rate. Discuss with the help of appropriate diagrams how these two mechanism can be implemented to solve this disequilibrium.
QUESTION 4 (20 MARKS)
“The short run effect of a decrease in money supply or contractionary Monetary Policy on real variables under Lucas Rational Expectation model, would be different if the decrease is expected as compared when it is not.”
Explain the above statement with the help of appropriate diagrams.
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