How will the central bank adjust the interest rate

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Reference no: EM131221799

In Given Figure, the central bank responds to an expenditure shock.

Suppose policymakers know the true slope of the AE curve but mismeasure the shock: they think the curve shifts to the right by 2 ?, twice the actual shift.

How will the central bank adjust the interest rate if it wants to keep output at potential? What will really happen to output? Explain.

Reference no: EM131221799

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