Problem -

Assume that the South African economy is currently in a short-run equilibrium with the actual unemployment rate above the natural rate of unemployment.

1. If the South African Reserve Bank wants to lower unemployment, what expansionary open-market operation should it use?

2. How will the open-market operation you identified in 1 affect real interest rates in the short run? Indicate and explain.

3. Given your answer in 2, what is the effect on real gross domestic product (GDP) in the short run? Indicate and explain.