Question

lf-= 2%, m = 75, and ?= 2%, what would the simple monetary rule dictate the real interest be if X, = 5%? IfX, = 2%, ?, =-2%? In each case, is the economy in an expansion, recession, or in the long run?

Answer 1

when $\prod t$ =5% then the economy is in an expansion. An inflation increase means unemployment decreases and real GDP increases than the long run equilibrium. In this case, monetary policy should be contractionary

when $\prod t$ =2% then the economy is in the long run equilibrium as it equalizes with $\prod$ =2%. In this case, no monetary policy is needed.

When $\prod t$ =-2% then the economy is in recession. As inflation decreases indicate an increase in unemployment so real GDP increases. In this case, the expansionary monetary policy is needed.