How should the federal reserve react if they desire to bring

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Reference no: EM13155812

suppose that the economy responds to the real interest rate according to the following equation: Yt= Y*-Y* (1.5)(rt-1-0.02). The phillips curve is :pi= pi +0.5 (Y-Y*)/Y*+v. Potential GDP is S2 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% Wren will they achieve that goal? (Hint: maintain plenty of decimal places.)

Reference no: EM13155812

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