1. The problem is to understand the formula for the interest rate $it$ given by: $$it = \theta_\pi (\pi_t - \pi_T) + \theta_Y (Y_t - Y_T)$$ where $\pi_t$ is the inflation at time $t$, $\pi_T$ is the target inflation, $Y_t$ is the output at time $t$, and $Y_T$ is the target output. 2. This formula expresses the interest rate as a linear combination of the deviations of inflation and output from their respective targets. 3. The parameters $\theta_\pi$ and $\theta_Y$ represent the sensitivity of the interest rate to inflation and output gaps respectively. 4. To analyze or graph this function, we consider $it$ as a function of $\pi_t$ and $Y_t$ with fixed targets $\pi_T$ and $Y_T$. 5. The formula can be rewritten as: $$it = \theta_\pi \pi_t - \theta_\pi \pi_T + \theta_Y Y_t - \theta_Y Y_T$$ 6. This is a plane in the 3D space of $(\pi_t, Y_t, it)$. 7. For graphing purposes, if we fix $\pi_T$, $Y_T$, $\theta_\pi$, and $\theta_Y$, then $it$ varies linearly with $\pi_t$ and $Y_t$. Final answer: The interest rate $it$ is a linear function of inflation $\pi_t$ and output $Y_t$ deviations from their targets, weighted by $\theta_\pi$ and $\theta_Y$ respectively.