John Taylor of Stanford University proposed the following monetary policy rule: R t r = m(

Question:

John Taylor of Stanford University proposed the following monetary policy rule:

Rt – r̅ = m̅(πt – π̅) + n̅Ỹt.

That is, Taylor suggests that monetary policy should increase the real interest rate whenever output exceeds potential.

(a) What is the economic justification for such a rule?

(b) Combine this policy rule with the IS curve to get a new aggregate demand curve. How does it differ from the AD curve we considered in the chapter? Consider the response of short-run output to aggregate demand shocks and inflation shocks.

Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Macroeconomics

ISBN: 978-0393603767

4th Edition

Authors: Charles I. Jones

Question Posted: