3. (25 points) Consider the following Taylor Rule to describe the initiatives of the central bank: (3) where R, is the nominal interest rate, re is the real interest rate, * is the inflation rate, my is the target rate of inflation, and y, is potential GDP, and we can think of (y - y;) as percentage point deviations of output from potential output. (a) (5 points) Interpret the parameters a, and a. What would be implied if there were changes in these parameters at different points in time? (b) (2 points) What is the Taylor Principle? (c) (8 points) Suppose (3 - y,) = -0.05, or = 0.50, a, = 0.50, m/ = 0.02, r, = -0.002, and # = 0.005. Does this situation leave the central bank with any ability to use monetary policy to influence nominal interest rates to spur economic recovery?" Money and Banking Exam I - Page 5 of 6 Due: 3/4/2022 (d) (7 points) What would it imply if the central bank were to adopt a negative interest rate policy! Namely, how would you interpret a negative nominal interest rate? You may have to do some outside research on this, but the answer should be fairly casy to find. (e) (3 points) What options would the central bank have if they didn't want to adopt a negative nominal interest rate policy, but still be able to use monetary policy? Namely, what have actual central banks in major economies done in response to economic crises when they were constrained by the zero lower bound for nominal interest rates? Is the United States currently using a policy of this type? Again, you may have to do some outside research on this, but the answer should be easy to find