Create your own monetary policy rule

Reference no: EM132118710

Question: A monetary policy rule that completely offsets aggregate demand shocks: Our monetary policy rule responds only to shocks to the inflation rate. We saw in Section 13.5 that this means that aggregate demand shocks can cause the economy to undergo a "boom-recession" cycle. Create your own monetary policy rule that would insulate the aggregate economy completely from aggregate demand shocks - so that neither inflation nor output would change if an aggregate demand shock hit the economy. Explain why your policy works.

Reference no: EM132118710

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