New Keynesian models predict that stabilizing inflation would also stabilize this measure, a result that Jordi Galí and Olivier Blanchard called the “divine coincidence.” For 10 points each:
[10h] Name this difference between actual and potential GDP. It is related to a central bank’s target and actual interest and inflation rates by the Taylor Rule.
ANSWER: output gap
[10e] The output gap attempts to measure a country’s economic position relative to one of these intervals of expansion and recession. They are the subject of macroeconomic models named for “real” ones.
ANSWER: business cycles [accept real business cycles or real business cycle theory or RBCs]
[10m] To modulate output gaps or inflation rates via monetary policy, central banks can conduct one of these “operations” of giving or taking liquidity directly from commercial banks, often via bonds or repo agreements.
ANSWER: open market operations [or OMOs; accept refinancing or fine-tuning or structural operations; accept LTROs or MROs]
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