Please find below attached the Question and the Optimal Rate Rule derived in Question 1

\f2. The notion of contractionary and expansionary monetary policy can be expressed using the rate rule derived in question 1 by the expression 1 r(t) = F + 77(t) CY (7 + 71);) or 'r(t) 'r(t 1) = AF + 1 (7r(t) (t 1)) (Y (\"Y + $) and 1 AF r(t) r(t 1) 1 (7r(t) 7r(t 1)) Y (\"Y + E) where r(t) r(t 1) is the rate change made at time t by the central bank in response to the ination change 7r(t) 7r(t 1). The sign of AF indicates whether the rate change was contractionary or expansionary as follows: o If AF > 0 then the rate change was greater than that indicated solely by the change in ination and this is referred to as contractionary monetary policy because this rate change would decrease aggregate output Y more than the amount indicated by the change in ination. a If AF