ECON 1020 Lecture Notes - Lecture 80: Real Interest Rate, Overnight Rate, Taylor Rule

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ECON 1020 Full Course Notes
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ECON 1020 Full Course Notes
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Shows how much we want to change interest rates, in response to where the economy is on a certain number of metrics. If real gdp rises by 1% above potential gdp, the central bank should raise the overnight rate by 0. 5 percentage points. If inflation rises by 1% above its target of 2%, the bank should raise the overnight ending rate by 0. 5% When real gdp is equal to potential gdp and inflation is equal to its target, the overnight rate should remain about 4%, implying a real interest rate of 2% - equilibrium base. Monetary policy, real gdp, and the price level: Cause-effect chain: the transmission mechanism: money supply impacts interest rates. Interest rates affect investment (also consumption but less important) If interest rates increase, investments decrease, ae decreases, and equilibrium gdp decreases, and vise versa. Increase money supply (boc), leads to lower interest rates, leads to higher investment, which increases aggregate demand (higher output and price)

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