Question: b) A macro model is given by: Yt = 7 - 1(rt - Pt-1-(1-7) (1) Pt = h(yt 7) + Pt-1 (2) re = f

b) A macro model is given by: Yt = 7 - 1(rt - Pt-1-(1-7) (1) Pt = h(yt 7) + Pt-1 (2) re = f + g(Pt-1 - P) + b(Yt-1 -) (3) where pt. Yt and r are the rate of inflation, the logarithm of real output, and the nominal interest rate, respectively. 7,7,7,6,7,g and h are constants. i) Explain briefly the interpretation of each equation in the model. (9 marks) ii) What values of the policy parameters g and b would you suggest? Explain your reasoning (21 marks) b) A macro model is given by: Yt = 7 - 1(rt - Pt-1-(1-7) (1) Pt = h(yt 7) + Pt-1 (2) re = f + g(Pt-1 - P) + b(Yt-1 -) (3) where pt. Yt and r are the rate of inflation, the logarithm of real output, and the nominal interest rate, respectively. 7,7,7,6,7,g and h are constants. i) Explain briefly the interpretation of each equation in the model. (9 marks) ii) What values of the policy parameters g and b would you suggest? Explain your reasoning (21 marks)

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