Suppose the Fed Is Considering Three Different Policy Rules, as Shown

question 22

Essay

Suppose the Fed is considering three different policy rules, as shown in the following table. $$\begin{array} { | c | c | c | c | } \hline \text { Inflation } & \begin{array} { c } \text { Policy Rule 1 } \\\text { (R) }\end{array} & \begin{array} { c } \text { Policy Rule 2 } \\\text { (R) }\end{array} & \begin{array} { c } \text { Policy Rule 3 } \\\text { (R) }\end{array} \\\hline 0 & 2 & 2 & 3 \\\hline 1 & 3 & 4 & 5 \\\hline 2 & 4 & 6 & 7 \\\hline 3 & 5 & 8 & 9 \\\hline 4 & 6 & 10 & 11 \\\hline 5 & 7 & 12 & 13 \\\hline\end{array}$$ (A) What is the difference between Rule 1 and Rules 2 and 3?
(B) What is the difference in the target infletion rate between Rules 2 and 3?
(C) Suppose the Fed is curtenty following Rule 2 and shifts to Rule 3 . Which way wril the $A D$ curve shift? Why wald the Fed make such a chenge in policy?

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