If monetary policy in an AE/PC model with time lags is made using Taylor’s rule,

ID: 1117736 • Letter: I

Question

If monetary policy in an AE/PC model with time lags is made using Taylor’s rule, an adverse supply shock results is

an immediate increase in the real interest rate, with immediate drops in output and inflation

. an immediate increase in the real interest rate with a drop in real output and inflation one year later

. a lagged increase in the real interest rate accompanied by lagged decreases in output and inflation

. an immediate increase in the real interest rate, with output falling one year later and inflation falling two years later.

(a) An immediate increase in the real interest rate, with immediate drops in output and inflation.

It is called impulse response function

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