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

question 14

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. What is the implication of this rule?

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

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Definitions:

Mono-

A prefix meaning one, single, or alone; used in various scientific and medical terms.

Brady-

A prefix used in medical terms to denote slowness, as in bradycardia, which means slow heart rate.

Slow

Characterized by a low speed; not fast or quick.

Insomnia

A sleep disorder characterized by difficulties in falling asleep, staying asleep, or obtaining restorative sleep.