a "Taylor Rule." The standard version can be written in this form:
iTR = r +p + a ·(p -p *)+ b · (y - y*/y* ·100)
(a) What is the logic or rationale behind this rule?
(b) Using the numbers given in the table below, calculate the Taylor Rule interest rate for 2005. What would the Taylor Rule suggest about actual U.S. monetary policy that year? Briefly explain.
i = 3.2 r = 2 p = 3.4 p* = 2.5 y = 12,638.4 y*= 12,702 a = 0.5 b = 0.5
(c) How might your conclusion be different if
1. potential output is actually 12,897?
2. the appropriate inflation rate to use is core inflation, which was 2.2%?