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Express the PC equation
Гt=ГEt/Гt-1+θ(yt-ye)
θalfa: coef of y, measures the responsiveness of inflation to changes in the output gap.
Derive the MR curve
Explain the taylor principle
The CB uses real interest rate to implement his policy. However it must adjust the nominal interest to achieve a desired real interest rate on the IS curve
The real r is chosen to secure right level AD hence output.
To deliver right AD=> set r=r(level shown at IS)
IS:
y= k(c0+a0+G)-ka1r
y=A-ar
Dynamic IS is used
Yt= At-art-1
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