Assume that as a consequence of an IS shock the economy is initially at a point with output above equilibrium (y > ye), and inflation of 4% above a 2% target. By means of a diagram, explain how the central bank will respond to this new information about economic conditions and discuss the effects on the economy. The central bank minimizes a loss function (L), where the government requires it to keep next period's inflation close to the target whilst avoiding large output fluctuations: L= (y1-ye+ B (71 – 7) 1) Discuss the critical parameter in the central bank's loss function. 11) Identify and explain the central bank's constraint. 111) Show that the monetary rule is (vi-ya) =-a B(T - 7). iv) Derive the central bank's Interest- rate Rule (IR equation) based on the stabilizing interest rate.
Assume that as a consequence of an IS shock the economy is initially at a point with output above equilibrium (y > ye), and inflation of 4% above a 2% target. By means of a diagram, explain how the central bank will respond to this new information about economic conditions and discuss the effects on the economy. The central bank minimizes a loss function (L), where the government requires it to keep next period's inflation close to the target whilst avoiding large output fluctuations: L= (y1-ye+ B (71 – 7) 1) Discuss the critical parameter in the central bank's loss function. 11) Identify and explain the central bank's constraint. 111) Show that the monetary rule is (vi-ya) =-a B(T - 7). iv) Derive the central bank's Interest- rate Rule (IR equation) based on the stabilizing interest rate.
Oh no! Our experts couldn't answer your question.
Don't worry! We won't leave you hanging. Plus, we're giving you back one question for the inconvenience.
Submit your question and receive a step-by-step explanation from our experts in as fast as 30 minutes.
You have no more questions left.
Message from our expert:
Hi and thanks for your question! Unfortunately we cannot answer this particular question due to its complexity.
We've credited a question back to your account. Apologies for the inconvenience.
Your Question:
Recommended textbooks for you