Macroeconomics Quiz
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MONEY, BANKING & INTEREST RATES
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A central bank follows a policy rule where the target interest rate is set according to the formula: Target Rate = 2% + 1.5 × (Inflation Gap) + 0.5 × (Output Gap). The inflation target is 2% and potential output is $20 trillion. If the current inflation rate is 5% and actual output is $19 trillion, what should the target rate be?
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