Question: How does the increase in e affect the MP relation when a < 1? What happens to output and the real interest rate in the

How does the increase in πe affect the MP relation when a < 1? What happens to output and the real interest rate in the short run?

d. Again assume that inflation and expected inflation will increase over time if Y > Yn and that they will decrease over time if Y < Yn. Given the effect on output you found in part (c), will πe tend to return to the target rate of inflation, π*, over time? Is it sensible for the parameter a (in the interest rate rule) to take values less than one?

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