Question
John Taylor of Stanford University proposed the following monetary policy rule: R t - r = m(pi t -pi) + nY t . That is,
John Taylor of Stanford University proposed the following monetary policy rule: Rt - r = m(pit-pi) + nYt. That is, Taylor suggests that monetary policy should change the real interest rate not only when inflation exceeds the target, but also when output exceeds potential.The IS curve is described byYt = a - b(Rt-r), and the Phillips curve bypit = pit-1 + vYt + o. Answer the following questions.
- (3 points) How is the AD when the Federal Reserve does not respond to inflationdifferent from when it does?
- (5 points) How does the output gap respond to demand shocks,, when the Federal Reserve reacts to inflation relative to when it does not?
- (5 points) How does the output gap respond to inflation shocks,, when the Federal Reserve reacts to inflation relative to when it does not?
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Power And Plenty Trade, War, And The World Economy In The Second Millennium
Authors: R Findlay, Ronald Findlay
1st Edition
0691143277, 9780691143279
