How does its mistake affect the interest rates

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Reference no: EM131221793

Suppose the central bank measures the output gap accurately but mismeasures the neutral real interest rate. It believes the neutral rate is 1 percent, but the true neutral rate is 3 percent.

If the central bank follows the Taylor rule, how does its mistake affect the interest rates it sets and the behavior of output and inflation? Explain.

Reference no: EM131221793

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