Suppose the Central Bank sets 1 year real interest rates by following this Taylor rule: rt = + 0.5(π² - π*) and where r = 4% and л* = 3% where is the expected inflation rate Nominal interest rates are equal to the real interest rate plus the expected inflation it = rt + ne (a) Suppose in period 1 inflation is expected to be 1%. Calculate the 1 year nominal and real interest rates in period t. (b) Calculate the 1 year nominal and real interest rates when inflation is oynocted to be 5% for the period ++1

Suppose the Central Bank sets 1 year real interest rates by following this Taylor rule: rt = + 0.5(π² - π) and where r = 4% and л = 3% where is the expected inflation rate Nominal interest rates are equal to the real interest rate plus the expected inflation it = rt + ne (a) Suppose in period 1 inflation is expected to be 1%. Calculate the 1 year nominal and real interest rates in period t. (b) Calculate the 1 year nominal and real interest rates when inflation is oynocted to be 5% for the period ++1

Survey Of Economics

10th Edition

ISBN:9781337111522

Author:Tucker, Irvin B.

Publisher:Tucker, Irvin B.

Chapter13: Inflation

Section: Chapter Questions

Problem 14SQ

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