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Suppose there is a permanent reduction in the liquidity demand for money in an economy due to the introduction of credit cards.

(a) Assuming that output is fixed, examine the effect of this change on the exchange rate, the nominal interest rate and the price level in both the short-run and the long-run.

(b) Now suppose there is a temporary technical problem in the credit card payment system that makes credit cards un-usable. How does this affect the exchange rate and nominal interest rate in the short-run and the long-run?

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