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Question 3 - c) - JIMK14 - 20210214 = c) The Taylor Rule is given by i p* + 7 + 1.5 (11 T) +
Question 3 - c) - JIMK14 - 20210214 = c) The Taylor Rule is given by i p* + 7 + 1.5 (11 T) + 0.5 Assume that r* is 1% and the inflation target is 2%. Also assume that after the shock described above, inflation increased to 3% and the output gap decreased to negative 4%. (i) What interest rate did the CB set before the economic shock (i.e. when inflation was at the target and there was no output gap)? (2 points) (ii) What interest rate does the CB set after the shock if it does not care about stabilizing inflation? (2 points) (iii) Assume that the Central Bank cares about stabilizing both inflation and production. What interest rate does the CB set after the shock? (2 points) Question 3 - c) - JIMK14 - 20210214 = c) The Taylor Rule is given by i p* + 7 + 1.5 (11 T) + 0.5 Assume that r* is 1% and the inflation target is 2%. Also assume that after the shock described above, inflation increased to 3% and the output gap decreased to negative 4%. (i) What interest rate did the CB set before the economic shock (i.e. when inflation was at the target and there was no output gap)? (2 points) (ii) What interest rate does the CB set after the shock if it does not care about stabilizing inflation? (2 points) (iii) Assume that the Central Bank cares about stabilizing both inflation and production. What interest rate does the CB set after the shock? (2 points)
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