Hi i've tried this question but i'm not sure if i'm doing it right- could someone pls give me a hand? Below is the question. Thanks
Q:
Assume that a central bank in the past when determining the cash rate placed equal weight on the output gap and the inflation rate. Also assume that the long-run equilibrium interest rate in this country is 2% ( ̅r= 2%).
Let’s assume that the nominal interest rate (i) = 5%. Will the central bank decrease or increase the nominal interest rate for each of the above scenarios? (1 mark) What is the direction of the impact of the change in the nominal interest rate on the output gap and the rate of inflation for each of the above scenarios? (1 mark) Is the economic situation improved by the change in the interest rate? (1 mark)
Situations:
1.Output Gap = 3%
Inflation (π) = 5%
2.Output Gap = -3%
Inflation (π) = -1%
3.Output Gap = -2%
Inflation (π) = 5%
Q:
Assume that a central bank in the past when determining the cash rate placed equal weight on the output gap and the inflation rate. Also assume that the long-run equilibrium interest rate in this country is 2% ( ̅r= 2%).
Let’s assume that the nominal interest rate (i) = 5%. Will the central bank decrease or increase the nominal interest rate for each of the above scenarios? (1 mark) What is the direction of the impact of the change in the nominal interest rate on the output gap and the rate of inflation for each of the above scenarios? (1 mark) Is the economic situation improved by the change in the interest rate? (1 mark)
Situations:
1.Output Gap = 3%
Inflation (π) = 5%
2.Output Gap = -3%
Inflation (π) = -1%
3.Output Gap = -2%
Inflation (π) = 5%
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