Using the IS-PC-MR model, discuss the logic behind the best response Taylor rule given by, 0 = 1 ( + 1 ) (0 ).

(i) Using diagrams, show how the initial interest rate response to an inflation shock varies with the slope of the MR. [10]

(ii) What parameters affect the slope of the MR? [2]

(iii) Explain how the Taylor rule could find the best response nominal interest rate to be negative