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Use a graph to analyze the impact of a supply shock, if a central bank does not satisfy the Taylor principle. In particular, assume that
Use a graph to analyze the impact of a supply shock, if a central bank does not satisfy the Taylor principle. In particular, assume that the responsiveness of the target interest rate to inflation is slightly less than zero so that the nominal interest rate rises less than one for one with inflation. Does this analysis contradict or reinforce the Taylor principle as a guideline for the design of monetary policy?
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