Suppose the current inflation rate is a constant 7% and the central bank implements a disinflation policy to reduce it to its target rate of 3%. To achieve this objective the central bank, by increasing its cash rate, raise the nominal interest rate from its current 9% to 14%. In the long run, at which the central bank achieves its inflation target, what will be the nominal rate of interest, the real rate of interest and the inflation rate?
Suppose the current inflation rate is a constant 7% and the central bank implements a disinflation policy to reduce it to its target rate of 3%. To achieve this objective the central bank, by increasing its cash rate, raise the nominal interest rate from its current 9% to 14%. In the long run, at which the central bank achieves its inflation target, what will be the nominal rate of interest, the real rate of interest and the inflation rate?
Chapter13: Inflation
Section: Chapter Questions
Problem 10SQ
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Suppose the current inflation rate is a constant 7% and the central bank implements a disinflation policy to reduce it to its target rate of 3%. To achieve this objective the central bank, by increasing its cash rate, raise the nominal interest rate from its current 9% to 14%. In the long run, at which the central bank achieves its inflation target, what will be the nominal rate of interest, the real rate of interest and the inflation rate?
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