John Taylor of Stanford University proposed the following monetary policy rule: R t r = m(

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John Taylor of Stanford University proposed the following monetary policy rule:

R_t – r̅ = m̅(π_t – π̅) + n̅Ỹ_t.

That is, Taylor suggests that monetary policy should increase the real interest rate whenever output exceeds potential.

(a) What is the economic justification for such a rule?

(b) Combine this policy rule with the IS curve to get a new aggregate demand curve. How does it differ from the AD curve we considered in the chapter? Consider the response of short-run output to aggregate demand shocks and inflation shocks.

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Related Book For answer-question

Macroeconomics

ISBN: 978-0393603767

4th Edition

Authors: Charles I. Jones

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Question Posted: Feb 14, 2020 08:02 AM

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John Taylor of Stanford University proposed the following monetary policy rule: R t r = m(

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a There is an inflationary gap whenever actual output exceeds potential output resulting in higher p...View the full answer

Macroeconomics

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