Would the policy reaction be stabilizing destabilizing

Reference no: EM13720156

Suppose that the Fed were committed to the following Taylor-style policy rule for the Federal Fundsrate: iF F = π + 0.02 + 0.5(π - π∗) + 0.5Yˆ , where iF F is the nominal Federal Funds rate, π is the annualinflation rate, π∗ = 2% is the target inflation rate, and Yˆ is the deviation of output from potential(i.e., Yˆ =Y -Y¯Y¯).For each of the following shocks, determine the effects of the policy prescribed by the Taylor Rule onthe Federal Funds rate, output, and inflation. Would the policy reaction be stabilizing, destabilizing, orneutral relative to leaving the money supply unchanged after the shock?a. A temporary boost in government purchases.b. A negative technology shock.c. An increase in money demand.d. A drop in consumer confidence.

Reference no: EM13720156

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