The money supply of a country has been growing for many years causing expected inflation of 8% per year. The economy’s current GDP growth rate is 1%. The Central Bank’s full employment target GDP growth rate is 5%. The “real” interest rate, r, is 4%. Following a policy that targets only inflation,  with speed of adjustments ay =0 and aπ = 0.5, where 6% is the new target inflation rate  what should their target nominal interest rate be set at?

Economics For Today
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ISBN:9781337613040
Author:Tucker
Publisher:Tucker
Chapter26: Monetary Policy
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The money supply of a country has been growing for many years causing expected inflation of 8% per year. The economy’s current GDP growth rate is 1%. The Central Bank’s full employment target GDP growth rate is 5%. The “real” interest rate, r, is 4%. Following a policy that targets only inflation,  with speed of adjustments ay =0 and aπ = 0.5, where 6% is the new target inflation rate

 what should their target nominal interest rate be set at?

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