3. The Taylor Rule and inflation Suppose the initial inflation rate and inflation target are both 2%, that the real federal funds rate is 2%, and that the economy is at the full employment level of output. According the Taylor Rule, the federal funds target should be Suppose now that the inflation rate changes to 4%. The Taylor Rule now prescribes that the federal funds target should be Next, suppose that economists predict that the economy would be at full employment at a level of $18.50 trillion. However, the actual GDP in the United States is $17 trillion. Assuming that the inflation rate is still 4%, the Taylor Rule prescribes that the federal funds target should be

3. The Taylor Rule and inflation Suppose the initial inflation rate and inflation target are both 2%, that the real federal funds rate is 2%, and that the economy is at the full employment level of output. According the Taylor Rule, the federal funds target should be Suppose now that the inflation rate changes to 4%. The Taylor Rule now prescribes that the federal funds target should be Next, suppose that economists predict that the economy would be at full employment at a level of $18.50 trillion. However, the actual GDP in the United States is $17 trillion. Assuming that the inflation rate is still 4%, the Taylor Rule prescribes that the federal funds target should be

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question 5. Suppose that an economy has the real GDP growth of 1% in a given year, the money supply decreases 1%, velocity of money increases 5%, and real interest rate is constant at 3%. a. How much is the inflation rate? b. According to the Fisher equation, how much is the nominal interest rate?
2. Why does the "quality/new goods bias" arise if the inflation rate is calculated based on a fixed basket of goods?
Table 15-3 Year 2018 2019 Potential Real GDP $18.0 trillion 18.5 trillion real GDP and potential GDP potential GDP and the inflation rate $18.0 trillion 18.8 trillion real GDP and the unemployment rate real GDP and the inflation rate < Previous Real GDP Refer to Table 15-3. Consider the hypothetical information in the table above for potential real GDP, real GDP, and the price level in 2018 and in 2019 if the Federal Reserve does not use monetary policy. If the Fed uses monetary policy successfully to keep real GDP at its potential level in 2019, which of the following will be lower than if the Fed had taken no action? Price Level 150 154 1 Next ▸
3. An economy has full-employment output of 1000. The other aggregates are as follows Cd = Id = 200+0.8(YT) - 500r 200-500r G = 196 T = 20+0.25Y Money demand is Md P = 0.5Y -250(r+π²) where expected rate of inflation л² = 0.10. The nominal supply of money M = 9890. 3.1 What are the general equilibrium values of the real interest rate, price level, consumption, and and investment?. 3.2 Suppose that government purchases are increased to G = 216. What are the new gen- eral equilibrium values of the real interest rate, the price level, consumption, and and investment?.
12. Suppose that the money demand function is: d = 900 - 60i where r is the interest rate in percent. The money supply M is 3,000 and the price level P is fixed at 6. (optional) a. Graph the supply and demand for real money balances. Make sure to label all curves and axes. b. What is the equilibrium interest rate? What happens to the equilibrium interest rate if the supply of money is reduced from 3,000 to 2,400? Show your work. a. If the central bank wants the interest rate to be 3 percent, what money supply should it set? Show your work.
A25 Subject - economics
The Fed's mandated goals are "maximum employment, stable prices, and moderate long-term interest rates." Explain the harmony among these goals in the long run. In the long run, ________. A. increases in monetary aggregates create a positive output gap and price stability, maximum employment, and close-to-zero nominal interest rates B. low nominal interest rates bring maximum employment, stable prices, and eliminate structural unemployment C. price stability brings maximum sustainable potential GDP growth, maximum employment, and a nominal interest rate close to the real interest rate D. price stability brings maximum sustainable potential GDP growth, unemployment below the natural rate, and nominal interest rates that rise slowly
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K Suppose that the equilibrium real federal funds rate is 4 percent and the target rate of inflation is 1 percent. Use the following information and the Taylor rule to calculate the federal funds rate target: Current inflation rate = 6 percent Potential real GDP = $14.28 trillion Real GDP $14.29 trillion = The federal funds target rate is % (Enter your response rounded to two decimal places.)
9. Which of the following will result in expansionary monetary or fiscal policy being the LEAST effective in increasing real GDP? A. The LRAS curve has a negative slope B. Aggregate demand is less elastic than aggregate supply C. Wages and prices are very flexible and change quickly in reaction to policy changes D. The SRAS curve is perfectly elastic
4. A common rule used for describing the conduct of monetary policy is the Taylor π = r + 0.5 (²-³) + 0.5(π — ñ), where r is the real rate of rule, given by i interest and it is a target rate of inflation. Assume that the real interest rate at full employment to be constant at 2%. Assume also that the same 2% represents target inflation. a. What is the nominal interest rate i when inflation and output are at their equilibrium target level? b. Suppose that the central bank observes a rate of inflation of 4%. With all other variables at the same level. What is the nominal interest rate the central bank would target according to the Taylor rule?