How should the federal reserve react if they desire

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Reference no: EM13155738

Suppose that the economy responds to the real interest rate according to the following equation: Y, = Y* - Y* (1.5) (rl-1- 0.02). The phillips curve is: pi - pi c + 0.5 + v. Potential GDP is $2.25 billion; expectations are adaptive; the 2018 inflation rate was 4%. A price shock sufficient to raise inflation by two percentage points hits the economy in 2019. In an effort to bring inflation down they had set interest rates at 5% in 2018. How should the federal reserve react if they desire to bring inflation down to 3%. When will they achieve that goal? (Hint: maintain plenty of decimal places.)

Reference no: EM13155738

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