What are the consequences for the output gap in the long run

Reference no: EM131142006

Suppose output is initially equal to potential GDP and inflation is equal to 2 percent. Suppose a new chair of the Federal Reserve is appointed. This new chair believes that average inflation should be reduced to 1 percent. To achieve this new lower rate of inflation, should the Fed shift its policy rule by raising interest rates at each rate of inflation or by lowering interest rates at each rate of inflation? What are the consequences for the output gap in the short run of the policy shift that results? What are the consequences for the output gap in the long run?

Reference no: EM131142006

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