Which of the following is correct? The Fed determines the risk premium. The Fed directly sets the fed funds rate. The Fed has no influence over the fed funds rate. The Fed sets a target range for the fed funds rate.
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In the Fed model, the risk-free rate is: a. The interest rate that the Federal Reserve influences through its tools. b. The guaranteed rate of return all businesses in the economy earn. c. The risk premium that banks and the financial sector generate based on conditions. d. Households and foreign entities; firms and the (U.S.) government. e. Large firms and households; small firms and micro-capital organizations. GDP as a measure of the economy is limited by its inability to measure nonmarket activities, such as: a. Net exports. b. Household work. c. Government purchases. d. Spending on capital assets. e. Financial products bought through a brokerage.
Akash M.
According to the Taylor rule, ceteris paribus, if the actual inflation rate is above the Fed's target inflation rate, and if the growth rate of real GDP is below the long-run average growth rate, then the Fed would be expected to increase the Federal Funds Rate. The Fed's behavior could not be predicted without more information.
Andrew D.
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.)
Lottie A.
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