Suppose the Monetary Policy Curve Is R = 5

Essay

Suppose the monetary policy curve is r = 5 + 0.8π,and the current values for output and inflation are 16.8 and 2 percent,respectively.An increase in global resource prices pushes the inflation rate to 4 percent.Policy makers estimate that the monetary policy in place,responding to 4 percent inflation,will bring output down to 13.6,a decline considered excessive.Instead,they implement an autonomous easing of monetary policy to lower output from 16.8 to 16.Assuming no change in the slope of the monetary policy curve,determine the new curve.