Consider the Following Rule for Monetary Policy: R = 2 $\pi$

question 143

Multiple Choice

Consider the following rule for monetary policy: r = 2 percent + $\pi$ + 1/2(y - y*) /y* + 1/2( $\pi$ - $\pi$ *) , where r is the nominal interest rate, y is real GDP, y* is an estimate of the natural rate of output, $\pi$ is the inflation rate, and $\pi$ * is the inflation target. Which of the following statements is not correct?

• A)If aggregate demand shifts right from long-run equilibrium, this rule unambiguously implies that the Fed increases the nominal interest rate.
• B)If aggregate supply shifts right from long-run equilibrium at the inflation target, we cannot tell without more information whether the Fed should increase or decrease the nominal interest rate.
• C)If output is at its natural level, but inflation is above its target, the Fed must increase the nominal interest rate.
• D)If inflation is at its targeted level, but output is above its natural rate, the Fed must decrease the federal funds rate.

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Definitions:

Multistep Synthesis

The process of chemically creating a complex molecule through a series of individual chemical reactions, each step building upon the previous to construct the desired compound.

Organic Product

A compound or material derived from living organisms or synthesized to mimic structures found in natural substances.

Ether Solvents

A class of organic compounds with an oxygen atom connected to two alkyl or aryl groups, used as solvents due to their low reactivity and good dissolving properties.

Grignard Reagents

Organomagnesium compounds that are used in reactions to form carbon-carbon bonds.