Consider the Taylor Rule for the Target of the Overnight

question 72

Essay

Consider the Taylor rule for the target of the overnight interest rate.Suppose the equilibrium real overnight interest rate is 2 percent, the target rate of inflation is 3 percent, the current inflation rate is 3 percent, real GDP equals potential real GDP, and the weights are 1/2 for the inflation gap and the output gap.Using the Taylor rule, what does the target for the overnight interest rate equal? Next, if the Bank of Canada lowered the target for the inflation rate to 1 percent, how much would the target for the overnight interest rate change?

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Definitions:

Evaporation

The process by which water changes from a liquid to a vapor or gas, often contributing to the water cycle.

Homeostasis

The process by which living organisms regulate their internal environment to maintain a stable, constant condition.

Biological Molecules

Organic molecules essential for life, including carbohydrates, lipids, proteins, and nucleic acids.

Buffers

Substances that minimize changes in pH by absorbing or releasing hydrogen ions, thus maintaining a stable environment in solutions, especially in biological systems.