Module 7 quiz

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IS-PC-MP model exogeneous parameters

a0, a1, mpi, my, B

price level change variable

E pi

How will the economy evolve in period 2?

GDP gap, inflation & interest rate will begin to evolve back to their long run equilibrium values

if inflation is lower than target, the government should _________ government bonds

buy

inflation variable

pi

target inflation rate (variable)

pi^T

interest rate variable

r

natural interest rate (variable)

r bar

if inflation is higher than target, the government should ________ government bonds

sell

exogeneous parameters

variable that is not affected by others in the system

gdp gap variable

y


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