At point A in Figure 8, inflation is above its target level, and the real interest rate as shown by the IS curve is 3%. The target level of inflation is achieved at the equilibrium point B. In order to move the economy to the target level the central bank must raise the interest rate to create a fall in aggregate demand. Figure 8 shows a range of possible monetary rule (MR) curves that vary with the central bank inflation preference. Under which monetary rule (MR) curve will the central bank initially hike up the real interest rate to 11%?

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Chapter1: Making Economics Decisions
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Interest
rate (r)
14
12
10
8.
6.
4.
IS
Output
Inflation
MRW
MR,
|VPC
MR
14
12
MR
10
8.
MR,
2
PC
Output
Figure 8 The IS and MR curves
At point A in Figure 8, inflation is above its target level, and the real interest rate as shown by the IS
curve is 3%. The target level of inflation is achieved at the equilibrium point B. In order to move the
economy to the target level the central bank must raise the interest rate to create a fall in aggregate
demand. Figure 8 shows a range of possible monetary rule (MR) curves that vary with the central bank
inflation preference. Under which monetary rule (MR).curve will the central bank initially hike up the real
interest rate to 11%?
Select one:
O MRt
O MRx
O MRW
O MRy
O MRz
Transcribed Image Text:Interest rate (r) 14 12 10 8. 6. 4. IS Output Inflation MRW MR, |VPC MR 14 12 MR 10 8. MR, 2 PC Output Figure 8 The IS and MR curves At point A in Figure 8, inflation is above its target level, and the real interest rate as shown by the IS curve is 3%. The target level of inflation is achieved at the equilibrium point B. In order to move the economy to the target level the central bank must raise the interest rate to create a fall in aggregate demand. Figure 8 shows a range of possible monetary rule (MR) curves that vary with the central bank inflation preference. Under which monetary rule (MR).curve will the central bank initially hike up the real interest rate to 11%? Select one: O MRt O MRx O MRW O MRy O MRz
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