How 3 equation parameters affect policy response

Question 1

What is the Philips Curve equation?

Answer 1

πt= πt-1+ alpha(yt-ye)

Question 2

What is the MR curve equation?

Answer 2

(yt-ye)=-α𝝱(πt-πT)

Question 3

What happens when alpha is larger?

Answer 3

The larger alpha is, the steeper the Philips curve is, and the flatter the MR curve is.

π is more responsive to y.

Question 4

What happens when 𝝱 is larger?

Answer 4

The larger 𝝱 is, the flatter the MR curve is. More inflation averse CB.

Question 5

What does the MR curve embody?

Answer 5

1. Active rule-based monetary policy, pick an inflation target and adjust the interest rate to achieve this.
2. The trade-off between output and inflation.

Question 6

What happens when a is larger?

Answer 6

IS curve is flatter, therefore AD is more sensitive to interest rate changes. A smaller rate change is needed for a given shock.