Question

Which of the following options represents the NKRE model's Taylor rule equation in the form

R=[0,hi+(1−h)i
A)R=0,hi+(1−h)i
B) R=0,hi−(1+h)i
C) R=0,hi−(1−h)i
D) R=0,hi+(1+h)i
​

Answer 1

The correct Taylor rule equation from the options provided is A) R=0,hi+(1−h)i. This formula guides how a central bank should adjust interest rates based on inflation and economic conditions.

Step-by-step explanation:

The question is asking for the New Keynesian model's (NKRE) Taylor rule equation that instructs how a central bank should set nominal interest rates. The Taylor rule is an economic principle outlining how the central bank should adjust its interest rates in response to changes in economic conditions such as inflation or output gap. This formula ensures that the central bank can systematically manage monetary policy.

Looking at the provided options, the correct answer is A) R=0,hi+(1−h)i, which represents a smoothed interest rate approach. In this formula, 'R' is the target interest rate, 'i' represents the current inflation rate, '0' represents the neutral interest rate where the economy is at equilibrium, 'hi' represents the component of the Taylor rule influenced by inflation, and '(1−h)i' accounts for smoothing by including the lagged interest rate.