The Taylor rule: John Taylor of Stanford University proposed the following monetary policy rule: Rt-r = m(Tt - )+nỸ That is, Professor Taylor suggests that monetary policy should increase the real interest rate whenever output exceeds potential. (a): Explain the economic justification of this rule and consider the response of short-run output to AD shocks and inflation shocks.
The Taylor rule: John Taylor of Stanford University proposed the following monetary policy rule: Rt-r = m(Tt - )+nỸ That is, Professor Taylor suggests that monetary policy should increase the real interest rate whenever output exceeds potential. (a): Explain the economic justification of this rule and consider the response of short-run output to AD shocks and inflation shocks.
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Transcribed Image Text:The Taylor rule: John Taylor of Stanford University proposed the following monetary policy rule:
R₁ − F = m (πt — π) + ñỸt
That is, Professor Taylor suggests that monetary policy should increase the real interest rate
whenever output exceeds potential.
(a): Explain the economic justification of this rule and consider the response of short-run output to AD
shocks and inflation shocks.
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