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Consider an alternative simplified version of the Taylor rule, where monetary policy depends only on short-run output: Rt-r= n(~Yt).

(a) Draw an IS-MP diagram, but instead of the usual MP curve, plot the simplified version of the Taylor rule. You might label this curve MPR for "monetary policy rule."

(b) Now consider the effect of a positive aggregate demand shock in the IS-MPR diagram. (An example might be a fiscal stimulus.) Compare and contrast the effect of this shock on the economy in the standard IS-MP diagram versus the IS-MPR diagram. Why is the result different?

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M91924825

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