2. Suppose the monetary-policy rule has the wrong natural rate of interest, and the central bank follows this rule: ių = T, + pl+0,(Tt – n;) + Oy (Y, – Y,), where pl does not equal p, the natural rate of interest in the goods demand equation. The rest of the dynamic AD-AS model is the same as in the chapter. Solve for the long- run equilibrium under this policy rule. Explain in words the intuition behind your solution.

2. Suppose the monetary-policy rule has the wrong natural rate of interest, and the central bank follows this rule: ių = T, + pl+0,(Tt – n;) + Oy (Y, – Y,), where pl does not equal p, the natural rate of interest in the goods demand equation. The rest of the dynamic AD-AS model is the same as in the chapter. Solve for the long- run equilibrium under this policy rule. Explain in words the intuition behind your solution.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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