Consider an economy with initial output lower than the natural level of output (Y") and negative inflation rate (deflation). a) Now by using the IS-LM-PC model show graphically and describe the deflation spiral and the dynamics of output, inflation and the real interest rate.  b) Discuss the constraint of the central bank and monetary policy to help the economy when the nominal interest rate is close to zero. What type of policies a central bank can implement in this environment to combat deflation?

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