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r>r*, e down, NX up, Y up, (M/P)d up, r up, thus r will always = r* let o = theta, if o increases, I decreases, PE decreases,

Y decreases, IS shifts to the left tradeoff, free capital mobility, independent central bank, fixed exchange rate, choose two of these three lags: information lags, recognition lags, decision making lag, implementation la g Time inconsistency If actual real GDP is greater than potential, then the interest rate needs to in crease.