You are the head of the central bank and you follow the following Taylor Rule to...

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You are the head of the central bank and you follow the following Taylor Rule to set the nominal interest rate: i =r* + J_1 + ar(J-1 - 5) + ay (Y - y). ат The coefficient on the inflation-to-target rate gap is a = 0.4 and the coefficient of the output gap is ay = 0.6. Since the last FOMC meeting inflation has dropped by 1 percentage point and the output gap has risen by 0.5 percentage points. By how many percentage points do you change the nominal interest rate? Assume that r = 2%. It does not depend on the inflation rate or on output. Potential output y, at time t is given exogenously. You are the head of the central bank and you follow the following Taylor Rule to set the nominal interest rate: i =r* + J_1 + ar(J-1 - 5) + ay (Y - y). ат The coefficient on the inflation-to-target rate gap is a = 0.4 and the coefficient of the output gap is ay = 0.6. Since the last FOMC meeting inflation has dropped by 1 percentage point and the output gap has risen by 0.5 percentage points. By how many percentage points do you change the nominal interest rate? Assume that r = 2%. It does not depend on the inflation rate or on output. Potential output y, at time t is given exogenously.

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To calculate the change in the nominal interest rate using the Taylor Rule we need to plug in the va... View the full answer