The central bank wants to maintain inflation at a fixed target and to see the economy operating at potential output.

It sets its overnight rate (onr) based on the following rule:

onr = 2 + 1.2 (? - ?*) + 0.8 [(Y - Y_P)/Y_P] 100

a)If the economy is operating at potential output and the inflation rate is at the Bank's target, ?*, what is the Bank's onr setting?

Note:Keep as much precision as possible during your calculations. Your final answer should be accurate to at least two decimal places.

onr= % ?

b)Suppose a recession in a major trading partner lowers demand for domestic exports, lowers AD and lowers real income Y = Y_P= 1,180 to Y = 991.2. How would the central bank respond (+ for increase, - for decrease)?

Basis point change in onr=?

c)Alternatively, suppose a drop in labour productivity growth pushed the inflation rate up by 0.4 percent. How would the central bank respond (+ for increase, - for decrease)?

Basis point change in onr=?

The central bank wants to maintain ination at a xed target and to see the economyr operating at potential output. It sets its overnight rate {onr} based on the following nJIe: onr = 2 +1.2 (11 11*} + us [or YP)NF.] x 100 a} If the economy is operating at potential output and the ination rate is at the Bank's target, 11*, what is the Bank's onr setting? Note: Keep as much precision as possible during your calculations. Your nal answer should be accurate to at least two decimal places. 0|\": 0% b] Suppose a recession in a major trading partner lowers demand for domestic exports, lowers AD and lowers real income Y = Yp = 1,130 to Y = 991.2. How would the central bank respond (+ for increase, - for decrease)? Basis point change in our = t} 1:} Alternatively, suppose a drop in labour productivity growth pushed the ination rate up by 0.4 percent. How would the central bank respond (+ it increase, - for decrease)? Basis point change in onr = t}