Question

The central bank changes its policy rule to be more aggressive in responding tochanges in output. Specifically, it decides that it will increase the real interestrate by more than before if output rises, and cut it by more than before if output falls.

Answer 1

Step-by-step explanation:

The MVP curve will become steeper. It pivot is pointed around by the full employment level Y*.

whenY=Y°,Ф1 in Taylor's rule is inconseqencial.

Therefore there are 3 scenerios.

1. There could be an above full employment situation today where r rises and y falls, this is in line with fed taking a serious stand against overheating.

2.There could be a below full employment situation today in which r falls and y rises, this is in line with Fed taking a serious stand against unemployment.

3. We could have a situation of full employment today, at that case nothing happens.

Answer 2

The MP curve gets steeper. What point it pivots around (the pointthat is unchanged) is the full employment levelY*, since whenY=Y*,φ1in theTaylor rule doesn’t matter.So there are three cases: First, we could be abovefull employment today, in which caserrises andYfalls (consistent with the Fedtaking a more agressive stance against overheating). Second, we could be belowfull employment today, in which caserfalls and Y rises (consistent with the Fed taking a more agressive stance against unemployment). Third, we could be at full employment today, in which case nothing changes

Step-by-step explanation: