# Question: Suppose that the inflation rate is higher than i that

Suppose that the inflation rate is higher than i*, that the central bank announces it will reduce the inflation rate, and that it actually proceeds to do this. Answer the following:

(a) Suppose that the private sector believes the central bank announcement. What are the effects on the inflation rate and real output? Show this in a diagram.

(b) Suppose that the private sector does not believe the central bank announcement. What are the effects on the inflation rate and real output now? Show this in a diagram.

(c) Explain your results in parts (a) and (b).

(a) Suppose that the private sector believes the central bank announcement. What are the effects on the inflation rate and real output? Show this in a diagram.

(b) Suppose that the private sector does not believe the central bank announcement. What are the effects on the inflation rate and real output now? Show this in a diagram.

(c) Explain your results in parts (a) and (b).

**View Solution:**## Answer to relevant Questions

In Figure, discuss the severity of the 2008–2009 recession relative to previous recessions.In year 1 and year 2, there are two products produced in a given economy, computers and bread. Suppose that there are no intermediate goods. In year 1, 20 computers are produced and sold at $1,000 each, and in year 2, 25 ...Let Kt denote the quantity of capital a country has at the beginning of period t. Also, suppose that capital depreciates at a constant rate d, so that dKt of the capital stock wears out during period t. If investment during ...In this chapter, we showed an example in which the consumer has preferences for consumption with the perfect complements property. Suppose, alternatively, that leisure and consumption goods are perfect substitutes. In this ...Suppose that the central bank is in a repeated relationship with the private sector. If the inflation rate is i = i* and output is Y = YT, then suppose the reward each period to the central bank is u1. If consumers ...Post your question