Question 7 (20 marks) (a) Explain why net exports and net capital outflow are always equal. (7 marks) (b) News about monetary policy always talk about maintaining the interest rate at a stable level for a period of time until central bank officials decide it is time to change it. However, economics textbooks teach monetary policy as controlling the money supply at a certain level. Explain with diagrams whether a central bank can fix the interest rate and money supply at the same time when it makes monetary policy. (7 marks) (c) \"The economy is in full employment when cyclical unemployment is zero.\" Explain whether the statement is true, false or uncertain. (6 marks)
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This is because the interest rate and money supply have an inverse relationship. When the central bank wants to lower interest rates, it typically increases the money supply by buying government bonds or lowering reserve requirements for banks. This increase in Show more…
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