Suppose That The Short Term Nominal Interest Rate The One The Central Bank Actu

c)  Consider again the initial equilibrium before the foreign recession. Suppose there is an increase in the demand for real money balances in this economy that shifts the LM curve to Y=$88 + $10,000 (r+πe), (iii)

while the IS curve is given by (ii). On a diagram show how this will shift the LM

curve. What will be the new equilibrium interest rate and output? (7 points)

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