Central Bank a Conducts Monetary Policy According to the Following

question 77

Essay

Central Bank A conducts monetary policy according to the following monetary policy rule:
i = π + 2.0 + 0.90 (π - 2.0) + 0.10 (Y - 100),
and Central Bank B conducts monetary according to the following monetary policy rule:
i = π + 2.0 + 0.10 (π - 2.0) +0 .90 (Y - 100),
where i is the nominal interest rate measured in percent, π is the inflation rate measured in percent, and Y is output measured as a percentage of the natural level of output. The economies of the two countries are otherwise identical and operate as described by the dynamic model of aggregate demand and aggregate supply.
a. In which country will the dynamic aggregate demand curve be steeper? Explain.
b. If a positive supply shock of the same magnitude hits both countries, which country will experience the greatest variability in output? Explain.

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