consid… Show more The output gap is currently 2% and infla

consid… Show more The output gap is currently 2% and inflation is 3% with a target of 2%. The central bank is considering two alternative policy rules. One sets A = 0.75 and B = 1, whereas the other sets A = 0.25 and B = 2. a) Compare the behaviour of interest rates, inflation and output over the next five years for both rules. b) How does the volatility of inflation and output vary in each case? c) How would your answers change if: inflation = last year’s inflation + 0.5 x output gap last year? • Show less

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