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1. Suppose an economy is experiencing higher inflation rate as well as a recessionary gap. Using the policy reaction function, explain whether the Reserve bank will increase or decrease the interest rate? Explain the effect of an increase in imports on the equilibrium output and inflation in the AD-AS model. Carefully distinguish between the short run and the long run.
Would this affect the potential output? Why/Why not? Suppose capital in Country A increases from 100 in 2017 to 200 in 2018. Explain the
effect of this increase on real GDP, real GDP per capita and average labour productivity.

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