(2) Assume that the Fed follows a monetary policy rule that takes the form R=F+m (x -"). so that the rate the Fed chooses is equal to its lang-rum (marginal product of capital) value 7 only i the inflation rate z is equal to the Fed's target 7. This means that if inflation goes above the Fed's target, the interest rate is raised above 7 in ader to "cool off" the economy. m is a value which illustrates how severe the Fed reacts to inflation deviations. (a) Write this expression in point-slope form. That is, covert the above to an equation of the form R= constant +onstant a intercept slope (b) Plot the graph for this function. Your graph should have * a the horizontal axis and R on the vertical axis. (c) Show what happens to the graph, by shifting the monetary policy reaction curve in the ap- propriate direction, if the central bank decides to pursue a lower inflation target.

(2) Assume that the Fed follows a monetary policy rule that takes the form R=F+m (x -"). so that the rate the Fed chooses is equal to its lang-rum (marginal product of capital) value 7 only i the inflation rate z is equal to the Fed's target 7. This means that if inflation goes above the Fed's target, the interest rate is raised above 7 in ader to "cool off" the economy. m is a value which illustrates how severe the Fed reacts to inflation deviations. (a) Write this expression in point-slope form. That is, covert the above to an equation of the form R= constant +onstant a intercept slope (b) Plot the graph for this function. Your graph should have * a the horizontal axis and R on the vertical axis. (c) Show what happens to the graph, by shifting the monetary policy reaction curve in the ap- propriate direction, if the central bank decides to pursue a lower inflation target.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Solve the given Question in picture???

(2) Assume that the Fed follows a monetary policy rule that takes the form
R=r +m (7 - n"),
so that the rate the Fed chooses is equal to its long-run (marginal product of capital) value 7 only
if the inflation rate n is equal to the Fed's target n". This means that if inflation goes above the
Fed's target, the interest rate is raised above 7 in order to "cool off" the economy. m is a value
which illustrates how severe the Fed reacts to inflation deviations.
(a) Write this expression in point-slope form. That is, convert the above to an equation of the
form
R = constant + constant 7
intercept
slope
(b) Plot the graph for this function. Your graph should have n an the horizontal axis and R on
the vertical axis.
(c) Show what happens to the graph, by shifting the monetary policy reaction curve in the ap-
propriate direction, if the central bank decides to pursue a lower inflation target.

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