Draw a graph with the inflation rate on the horizontal axis

Reference no: EM132118817

Question: The coefficient on inflation in the nominal version of the policy rule: Consider the policy rule for the nominal interest rate in equation (13.5). Draw a graph with the inflation rate on the horizontal axis and the nominal interest rate on the vertical.

(a) What is the slope of this line? Is it larger than 1 or less than 1?

(b) Suppose the slope were the reverse of what you answered in part (a): larger or less than 1. Explain what this implies about the response of nominal interest rates to inflation in a good monetary policy rule.

Reference no: EM132118817

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