A. Consider the Taylor rule: rt = (s1)[rt−1] + (s2)[r n + ayY˜ + aπ(πt − π T )]. Assume target inflation at 2% and natur

[answerhappygod]

A. Consider the Taylor rule: rt = (s1)[rt−1] + (s2)[r n + ayY˜ +aπ(πt − π T )]. Assume target inflation at 2% and natural rate ofinterest at 1.8%. (a) If output gap increase by 1.5% and actualinflation to 4%, how much will be the interest rate increase from2% if the central bank gives twice more weight to output gap ascompared to inflation targeting weight of 0.5? Assume s1 = s2 =0.5. [Write the Taylor rule first and then compute.
B. Which component of this Taylor rule captures smoothnessof interest rate changes? and How?