5. Consider the Taylor rule: r= ($1)[rt-1]+ (S2) [r"+ QuY+аrл-л¹)]. Assume target inflation at2% and natural rate of interest at 1.8%. (a) If output gap increase by 1.5% and actual inflation to4%, how much will be the interest rate increase from 2% if the central bank gives twice more weightto output gap as compared to inflation targeting weight of 0.5? Assume s1 = S2 = 0.5. [Write theTaylor rule first and then compute]Which component of this Taylor rule captures smoothness of interest rate changes? and How?

From the Taylor Rule, the Federal Reserve should increase rates if inflation exceeds the desired…

Answered: sider the Tayl and natural ra how much…

Advanced Engineering Mathematics

10th Edition

ISBN:9780470458365

Author:Erwin Kreyszig

Publisher:Erwin Kreyszig

Chapter2: Second-order Linear Odes

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sider the Tayl and natural ra how much wi output gap as c lor rule first a