At point A in Figure 8, inflation is above its target level, and the real interest rate as shown by the IS curve is 3%. The target level of inflation is achieved at the equilibrium point B. In order to move the economy to the target level the central bank must raise the interest rate to create a fall in aggregate demand. Figure 8 shows a range of possible monetary rule (MR) curves that vary with the central bank inflation preference. Under which monetary rule (MR) curve will the central bank initially hike up the real interest rate to 11%?

At point A in Figure 8, inflation is above its target level, and the real interest rate as shown by the IS curve is 3%. The target level of inflation is achieved at the equilibrium point B. In order to move the economy to the target level the central bank must raise the interest rate to create a fall in aggregate demand. Figure 8 shows a range of possible monetary rule (MR) curves that vary with the central bank inflation preference. Under which monetary rule (MR) curve will the central bank initially hike up the real interest rate to 11%?

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter17: The Trade-off Between Inflation And Unemploy

Section: Chapter Questions

Problem 2TY

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