B) Analytical Part (Each section is worth 10 points) Question 1) Assume the formula below as the main formulas central bank of Turkey. Central Bank Interest Rate= 2.07+1.28* inflation rate-1.95* unemployment gap, Unemployment gap-Unemployment rate - Natural Rate of Unemployment (If inflation is 10%, in the formula inflation rate=10, NOT 0,1, similarly if natural rate of unemployment is 10%, unemployment rate is 15%, unemployment gap is 5%, (15-10-5) and in the formula, unemployment gap=5, not 0,05) a) Choose a country from internet. Find its unemployment rate and the inflation rate. Find the interest rate its central bank should set according to Taylor Rule. b) Now assume the country you choose wants to cut its interest rate by half. How should unemployment rate or inflation rate should change so that the country can cut interest rate and still follow the Taylor's Rule?
