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Suppose the target rate of inflation is 2.5%, the current rate of inflation is 2%, and the output gap is 3.5%. What is the interest rate if the Taylor rule is: r = 5.5 +1,75Y~ + 1.25(pi - pi r)? Using the equation in part (a), describe the meaning of the number 1.75. Using the equation in part (a), describe the meaning of the number 1.25. what is the interest rate if the Taylor rule is: r = 5.5 +1.75 Y~+ 1.75(pi - pi r)? Comment on these two Taylor rules. Which leads to higher interest rates, which leads to higher output? Which leads to higher inflation? Which represents a more hawkish Fed? Which represents a more dovish Fed?

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M9445881

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