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Monetary policy reaction function

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The Monetary Policy Reaction Function (MPRF) is the upward-sloping relationship between the inflation rate and the unemployment rate. When the inflation rate rises, a central bank wishing to fight inflation will rise interst rates to reduce ioutput and thus inrease the unemployment rate. The MPRF is a function of the Taylor Rule, the Investment-Spending Curve (IS Curve) and Okun's Law

The MPRF has the equation:

u = u0 + Φ(π - πt)


File:PCMPmaster.GIF

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