Suppose that the Bank of Canada were committed to following the Taylor rule. For each of the following types of shocks, determine whether the use of the Taylor rule would tend to be stabilizing or destabilizing, or would have an ambiguous effect, relative to a policy of leaving the money supply unchanged. Consider the behavior of both output and inflation.
a. An increase in money demand.
b. A temporary increase in government purchases.
c. An adverse supply shock.
d. A decline in consumer confidence.
e. An increase in export demand.