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5. Consider the Taylor rule: r= ($1)[rt-1]+ (S2) [r"+ QuY+аrл-л¹)]. Assume target inflation at 2% and natural rate of in
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5. Consider the Taylor rule: r= ($1)[rt-1]+ (S2) [r"+ QuY+аrл-л¹)]. Assume target inflation at 2% and natural rate of in
5. Consider the Taylor rule: r= ($1)[rt-1]+ (S2) [r"+ QuY+аrл-л¹)]. Assume target inflation at 2% and natural rate of interest at 1.8%. (a) If output gap increase by 1.5% and actual inflation to 4%, how much will be the interest rate increase from 2% if the central bank gives twice more weight to output gap as compared to inflation targeting weight of 0.5? Assume s1 = S2 = 0.5. [Write the Taylor rule first and then compute] Which component of this Taylor rule captures smoothness of interest rate changes? and How?