Does the economy still return to equilibrium

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Reference no: EM131221789

We have assumed that the coefficients in the Taylor rule, a_y and a_π, are both positive. Under this assumption, the rule guides the economy back to long-run equilibrium after a shock. The output gap eventually returns to zero, and inflation returns to its long-run level π^T.

a. Suppose the inflation coefficient a_π is positive but the output coefficient ay is zero. Does the economy still return to equilibrium with 0 and π - π^T after a shock? Explain.

b. How is the answer to the previous question different if a_y is positive and a_π is zero? Explain.

Reference no: EM131221789

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