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Many central banks around the world have mandates to keep the inflation rate close to 2%....

Many central banks around the world have mandates to keep the inflation rate close to 2%.

(a) Using an AD-AS diagram,explain why these mandates can lead to monetary policy being stabilizing (keeping GDP close to potential).

(b) Under what conditions might such mandates lead to monetary policy being destabilizing (leading to wider swings in GDP)?

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