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Please include steps and explanations
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Please include steps and explanations
Please include steps and explanations
A central bank has a new head, who decides to increase the response of interest rates to inflation from h, to h2=2h). Assume that the response of interest rates to output gap is g. How does this change in policy alter the response of the central bank to a supply shock which produces a negative output gap equal to 5 percent of potential output and increases inflation by 3 p.p. above 3 the target rate of inflation?
A central bank has a new head, who decides to increase the response of interest rates to inflation from h, to h2=2h). Assume that the response of interest rates to output gap is g. How does this change in policy alter the response of the central bank to a supply shock which produces a negative output gap equal to 5 percent of potential output and increases inflation by 3 p.p. above 3 the target rate of inflation?