The economy is characterized by the following equations:
An IS Curve overline Y_{t} = overline a -b(R t - overline r )
A Fisher equation: R t =i t -E t pi t + 1
A monetary policy rule: dot i t = overline r + chi_{t} +m( pi t - overline pi )+E t pi t+1 ,
A Phillips curve: pi t =E t - 1 pi t + nu tilde Y t + xi t .
Where X is a monetary policy shock, which means a change in interest rates by the Fed that is exogenous. The rest of the notation is the same as in class. The economy has been in the long- run equilibrium. Xt is zero in the long-run.
You will need the following values for some parameters: nu = 1 m = 3 ,b=1, overline pi = 2%
Suddenly, in a year we will call 2025, the Federal Reserve decides out of the blue to lower interest rates by 1 percentage point. That is chi_{2025} = (- 1)%
What is the value of short-run output in percentage points in the year 2025?
