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We have seen that short-run equilibrium output falls when the Fed raises the real interest rate. Suppose the relationship between short-run equilibrium output and the
We have seen that short-run equilibrium output falls when the Fed raises the real interest rate. Suppose the relationship between short-run equilibrium output and the real interest rate r set by the Fed is given by: Y = 1,000 1,000r. Suppose also that the Fed's reaction function is shown in the table below. Complete the table by computing the short-run equilibrium output for the whole-number inflation rates between 0 and 4 percent. Rate of Inflation, Real Interest, r Output (Y) 0.00 (~ 0%) 0.02 (~ 2%) 0.01 0.03 0.02 0.04 0.03 0.05 0.04 0.06
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