**Question 6**The figure below presents four panels that illustrate different developments of an economy's output over the course of a year. Each panel consists of three distinct lines:1. **Solid Line:** Represents the actual level of output.2. **Dashed Line:** Indicates the full-employment output.3. **Marked Line:** Depicts the interest rate as determined by the central bank.**Panel A:**- **Actual Output (Left Axis):** Starts at approximately 101.00 in January 2020, fluctuates slightly reaching around 101.70 in December 2020.- **Full-Employment Output (Left Axis):** Remains constant throughout the year, just above 100.00.- **Interest Rate (Right Axis):** Begins at about 0.02, showing a gradual increase with fluctuations, and ends at around 0.05 in December 2020.**Panel B:**- **Actual Output (Left Axis):** Begins slightly above 100.20 in January 2020, peaks around 100.80 in May and then fluctuates downward, reaching approximately 100.40 by December 2020.- **Full-Employment Output (Left Axis):** Steady just below 100.00 across the year.- **Interest Rate (Right Axis):** Starts at 0.02, rises slightly to about 0.04 in April, then decreases to around 0.03 by December 2020.These panels allow for a comparative analysis of the relationship between actual output, full-employment output, and interest rates during the specified period. The image contains two graphs labeled Panel C and Panel D, each showcasing economic data trends from January 2020 to December 2020. The graphs are used to analyze the consistency of interest rates with the Taylor rule, assuming an inflation rate of 1% and an inflation target of 2%.**Panel C:**- The graph includes three lines: - **Actual Output (left axis):** A solid line showing fluctuations around 100, with slight increases and decreases throughout the year. - **Full-Employment Output (left axis):** A dashed line remaining constant at a level slightly above 100, indicating the output level when the economy is at full employment. - **Interest Rate (right axis):** A dotted line showing minor fluctuations around a near-zero rate, indicating very low interest rates throughout the year.**Panel D:**- The graph also includes three lines: - **Actual Output (left axis):** A solid line depicting a decline starting at 100, decreasing to around 94 by the end of the year. - **Full-Employment Output (left axis):** A dashed line remaining constant at 100 throughout the year. - **Interest Rate (right axis):** A dotted line starting slightly below zero, dipping further and remaining negative or near zero, suggesting extremely low or negative interest rates for the year.**Question:**The problem posed is to determine which panel shows an interest rate set by the central bank that is inconsistent with the Taylor rule, given the specified conditions of inflation. The options provided are:- A. Panel A- B. Panel B- C. Panel C- D. Panel D(Note: Panels A and B are not shown in the image provided.)

The Taylor Rule is a methodology for projecting interest rates that was developed by renowned…

Panel C Panel D 101.00 0.04 101.00 0.04 100.00 100.50 0.03 0.03 99.00 98.00 97.00 96.00 95.00 94.00 100.00 0.02 0.02 99.50 0.01 0.01 99.00 93.00 92.00 98.50 -0.01 -0.01 actual output (left axis) actual output (left axis) full-employment output (left axis) full-employment output (left axis) interest rate (right axis) interest rate (right axis) Assume that inflation is 1% throughout the entire year and the inflation target is 2%. In which of the four panels the interest rate set by the central bank is inconsistent with the Taylor rule? Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20

Panel C Panel D 101.00 0.04 101.00 0.04 100.00 100.50 0.03 0.03 99.00 98.00 97.00 96.00 95.00 94.00 100.00 0.02 0.02 99.50 0.01 0.01 99.00 93.00 92.00 98.50 -0.01 -0.01 actual output (left axis) actual output (left axis) full-employment output (left axis) full-employment output (left axis) interest rate (right axis) interest rate (right axis) Assume that inflation is 1% throughout the entire year and the inflation target is 2%. In which of the four panels the interest rate set by the central bank is inconsistent with the Taylor rule? Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Jan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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