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Assume that the central bank has an inflation target of 2% per year but inflation is currently running at 4%. The nominal policy (interest) rate
Assume that the central bank has an inflation target of 2% per year but inflation is currently running at 4%. The nominal policy (interest) rate is currently 5%. The central bank needs to negative bargaining gap and estimates that the real policy rate required to achieve this is 3%. Consequently at which level does the central bankneed to set the nominal policy rate and why?
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