Based on the Taylor Rule use the following information to calculate the target federal funds rate. Variable Value Target inflation rate 2 percent Current inflation rate 1 percent Real equilibrium federal funds rate 2 percent Output gap 10 percent
Added by Ashley C.
Step 1
5*(Current Inflation Rate - Target Inflation Rate) + 0.5*Output Gap Substituting the given values into the formula: Show more…
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Suppose the Fed commits itself to the use of the Taylor rule (shown below) to set the federal funds rate. The federal funds rate equals Long-run target plus 1.5 * (Inflation rate minus Inflation target) plus 0.5 * (Output gap). Suppose the Fed has set the long-run target for the federal funds rate at 2.5 percent and its target for inflation at 3 percent. If the economy is currently hitting the Fed's inflation target and GDP exactly equals the trend GDP, then the Fed will set the federal funds rate at 0 percent. (Enter your response with no rounding.) Now suppose the economy slows down, causing the actual inflation rate to decrease to 2 percent and the economy to fall 1.5 percent below trend GDP. In this case, the Fed will seek to set the federal funds rate at 0 percent. (Enter your response with no rounding.)
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If the Federal Reserve tries to target inflation near 2%, the inflation rate is 3%, and output is 3% below potential GDP, then the target federal funds rate according to the Taylor rule is: Group of answer choices 3%. 4%. 5%. 6%.
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