Question 4 Suppose a country’s inflation level is higher than desired, and unemployment levels are lower than expected – the central bank decides that the economy is ‘overheated’ and attempts to use the appropriate monetary policy to deal with the situation. Describe, with the help of the appropriate figure, how a central bank might go about implementing such monetary policy, the subsequent effects this has on interest rates, the quantity of money in the market, and the process through which this affects the level of expenditure in the economy.

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