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The basic New Keynesian model in a closed economy is given by two equations: i= ( Y - Y m ) + 0.96 E( i'
The basic New Keynesian model in a closed economy is given by two equations:
i=(Y - Ym)+ 0.96E(i'),
Yd= -10(R -E(i') )+ 10.
Note: the notations follow textbook and lectures.
Continue to assume that E(i')=3%. Suppose that the central bank targets the inflation rate ati*=2%. If the inflation target is achieved, the output gap will be ______.
A.indeterminate
B.positive
C.zero
D.negative
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