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Calculate the interest rate the central bank

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Consider the following Taylor equation:it=i*+1.5(πt - π*) - 0.5(Ut - Un) Please explain the economic intuition behind the components of the Taylor equation. Calculate the interest rate the Central Bank must adopt if this rule is applied in the following situation: i*=2%, πt=5%, π*=2%, Ut=8%, Un=6%. Comment on the results.

Reference no: EM132795274

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