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A hypothetical economy, Veridia, is experiencing an inflation rate of 4.5% and an unemployment rate of 7.2%. The central bank has an inflation target of 2%. Calculate the change in the base interest rate required if the central bank typically adjusts the rate by 0.5 percentage points for every 1 percentage point deviation from its inflation target. Explain two potential macroeconomic effects of this specific interest rate adjustment on Veridia's economy. [8 marks].
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