Again, using the same open$-$economy IS curve from above, consider the case where the central banks outside the U$.$S$.$ are increasing the real interest rate by three percentage points in response to an inflation shock, i$.$e$.,$ Rt$=$r$+3\%.$

The monetary policy rule is given by Rt$$r$=$m$($t$$$)$ and the AS curve is t$=$t$1+$v$$Y~t$+$o$$t$,$ where m$=1$ and v$=0\mathrm{.}6.$

Luckily, the U$.$S$.$ does not experience the same inflation shock and therefore o$$t$=0.$

Like before, assume that the economy is at its long$-$run equilibrium at time t$1,$ t$1=$$=2\%.$

Even though the U$.$S$.$ is not directly affected by the inflation shock abroad, the rise in Rt$$ still affects domestic inflation and short run output since changes in the foreign real interest rate have an effect that is similar to a domestic demand shock.

Use the open$-$economy AS$/$AD model to calculate t$.$

Round your answer to the nearest tenth of a percent.

Hint: Use a spreadsheet application for your calculations. You will need the exact inflation rate to calculate short$-$run output in the next question.