We will now use the calculator to study the gap changes in the 1990 s associated with the decision of the Reserve Bank of New Zealand to adopt inflation targeting. Let's use a series of inflation shocks reflecting successive lowering of target inflation by the Fed. In the graph "calc" means calculated and "obs." means observed. My approach to this analysis is as follows: (a) Add a column in the calculator to calculate the unemployment gap from the output gap using Okun's law. Okun's coefficient for New Zealand is 0.47. This is useful because data for the unemployment gap is more common than is data for the output gap. (b) Use the data in the table below for as your target. I recommend fitting the unemployment gap since the rapid closing of the output gap from 1993 to 1994 seems to be due, in part, to a t an extra shock to the IS curve. (c) I started a shock sequence at model time t=0 and aligned that with actual time t=1990. The model coefficients were set to =1,=1, and y=0.25. Your submission for this question should be a screenshot of your calculator showing your calculated version of the graph above together with a brief discussion of (i) your shock sequence, (ii) the fit to the unemployment and output gaps, and (iii) the resulting rate and inflation gaps. Optimal Monetary Policy: Impulse Response An inflation shock at t=0. - For t1 : relaxation to equilibrium. Your submission for this question should be a screenshot of your calculator showing your calculated results for a single inflation shock of size 1.75 at t=3 years. Solution: Your graph should look like the one shown below. The maximum of the inflation shock of 1.75 is seen at the 3 year point. We will now use the calculator to study the gap changes in the 1990 s associated with the decision of the Reserve Bank of New Zealand to adopt inflation targeting. Let's use a series of inflation shocks reflecting successive lowering of target inflation by the Fed. In the graph "calc" means calculated and "obs." means observed. My approach to this analysis is as follows: (a) Add a column in the calculator to calculate the unemployment gap from the output gap using Okun's law. Okun's coefficient for New Zealand is 0.47. This is useful because data for the unemployment gap is more common than is data for the output gap. (b) Use the data in the table below for as your target. I recommend fitting the unemployment gap since the rapid closing of the output gap from 1993 to 1994 seems to be due, in part, to a t an extra shock to the IS curve. (c) I started a shock sequence at model time t=0 and aligned that with actual time t=1990. The model coefficients were set to =1,=1, and y=0.25. Your submission for this question should be a screenshot of your calculator showing your calculated version of the graph above together with a brief discussion of (i) your shock sequence, (ii) the fit to the unemployment and output gaps, and (iii) the resulting rate and inflation gaps. Optimal Monetary Policy: Impulse Response An inflation shock at t=0. - For t1 : relaxation to equilibrium. Your submission for this question should be a screenshot of your calculator showing your calculated results for a single inflation shock of size 1.75 at t=3 years. Solution: Your graph should look like the one shown below. The maximum of the inflation shock of 1.75 is seen at the 3 year point