The economy is characterized by the following equations: An IS Curve Y₁ =ā — b(R₁ − r) - - A Fisher equation: Rt = = it — Etπt+1 A monetary policy rule: it = F + Xt +m(πt − π) + Еtπt+1, - A Phillips curve: π₁ = Et−1πt +vỸt +§t. Where Xt is a monetary policy shock, which means a change in interest rates by the Fed that is exogenous. The rest of the notation is the same as in class. The economy has been in the long-run equilibrium. Xt is zero in the long-run. You will need the following values for some parameters: 1, m = 3, b = 1, π = 2% Suddenly, in a year we will call 2025, the Federal Reserve decides out of the blue to lower interest rates by 1 percentage point. That is X2025 = -1%. What is the value of the inflation rate in percentage points in the year 2025?

Economics: Private and Public Choice (MindTap Course List)
16th Edition
ISBN:9781305506725
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Chapter14: Modern Macroeconomics And Monetary Policy
Section: Chapter Questions
Problem 10CQ
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The economy is characterized by the following
equations:
An IS Curve Y₁ =ā — b(R₁ − r)
-
-
A Fisher equation: Rt
=
= it — Etπt+1
A monetary policy rule:
it = F + Xt +m(πt − π) + Еtπt+1,
-
A Phillips curve: π₁ = Et−1πt +vỸt +§t.
Where Xt is a monetary policy shock, which
means a change in interest rates by the Fed that is
exogenous. The rest of the notation is the same as
in class. The economy has been in the long-run
equilibrium. Xt is zero in the long-run.
You will need the following values for some
parameters: 1, m = 3, b = 1, π = 2%
Suddenly, in a year we will call 2025, the Federal
Reserve decides out of the blue to lower interest
rates by 1 percentage point. That is
X2025 = -1%.
What is the value of the inflation rate in
percentage points in the year 2025?
Transcribed Image Text:The economy is characterized by the following equations: An IS Curve Y₁ =ā — b(R₁ − r) - - A Fisher equation: Rt = = it — Etπt+1 A monetary policy rule: it = F + Xt +m(πt − π) + Еtπt+1, - A Phillips curve: π₁ = Et−1πt +vỸt +§t. Where Xt is a monetary policy shock, which means a change in interest rates by the Fed that is exogenous. The rest of the notation is the same as in class. The economy has been in the long-run equilibrium. Xt is zero in the long-run. You will need the following values for some parameters: 1, m = 3, b = 1, π = 2% Suddenly, in a year we will call 2025, the Federal Reserve decides out of the blue to lower interest rates by 1 percentage point. That is X2025 = -1%. What is the value of the inflation rate in percentage points in the year 2025?
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