Assume that inflation expectations are formed rationally. Use the 3-equation model to show the adjustment of the
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Assume that inflation expectations are formed rationally. Use the 3-equation model to show the adjustment of the economy to a permanent demand and a permanent supply shock. Provide a period by period explanation of the adjustment process (as done in Chapter 3). How does the central bank reaction differ from the cases where we assumed adaptive inflation expectations (as shown in the last chapter)?
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Related Book For 
Macroeconomics Institutions Instability And The Financial System
ISBN: 9780199655793
1st Edition
Authors: Wendy Carlin, David Soskice
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