A) Using the original Taylor Rule where the equilibrium real rate of interest is estimated to be 2% and the target inflation rate is 2%, what is the federal funds rate implied by the Taylor Rule?b) Using the Mankiw Rule, what is the federal funds rate implied by the Mankiw Rule?c) According to the Taylor Rule, was the Fed being hawkish or dovish during this period? Explain and be specific with numbers.d) Relate your answer in part c) to the work done by Kydland and Prescott.e) Draw a reserve market diagram (reserve supply and reserve demand) locating the point associated with the actual federal funds rate on 1976-04-01 as point A. We don't know what value reserve supply is so just label as RS. Now assuming a stable reserve demand curve, explain and show what the Fed would have had to do to obtain the federal funds rate implied by the Taylor rule. Label this point as point B. FF - the federal funds ratePCE INF = PCE inflationPCE CORE = the core rate of PCE inflationGDP = real GDPGDP POT = potential GDPUR = the unemployment rateGDP and PCE inflation tableDATESFFPCE INF PCE COREGDPGDP POTUR1974-04-01 11.2510.07.15425.45404.65.21974-07-01 12.0911.08.75372.85455.05.61974-10-019.3511.59.95351.45505.26.61975-01-016.3010.310.15286.75554.28.31975-04-015.428.69.15327.45601.58.91975-07-016.167.87.75415.55648.28.51975-10-015.416.86.85488.55694.48.31976-01-014.836.06.35612.45739,87.71976-04-015.205.66.05654.85784.97.61976-07-015.285.26.05683.65830.47.71976-10-014.875.16.05726.25876.97.81977-01-014.665.86.15792.95925.77.51977-04-015.166.86.55906.65976.77.11977-07-015.826.86.66011.16029.36.91977-10-016.516.66.56011.76083.66.71978-01-016.766.56.46032.66140.06.31978-04-017,286.86.66267.26199,76.01978-07-018.107.16.76328.56259.86.01978-10-019.587.67.06413.36319.55.91979-01-0110.077.86.86426.16377.25.9We are using data from 1976-07-01 to answer this question.

Given:For 1976-04-01,FF=5.2PCE INF(Ie)=5.6PCE CORE=6GDPe =5654.8GDPt =5784.9UR=7.6Target inflation…

Answered: A) Using the original Taylor Rule where…

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Publisher:NEWNAN

Chapter1: Making Economics Decisions

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A) Using the original Taylor Rule where the equilibrium real rate of interest is estimated to be 2% and the target inflation rate is 2%, what is the federal funds rate implied by the Taylor Rule? b) Using the Mankiw Rule, what is the federal funds rate implied by the Mankiw Rule? c) According to the Taylor Rule, was the Fed being hawkish or dovish during this period? Explain and be specific with numbers. d) Relate your answer in part c) to the work done by Kydland and Prescott. e) Draw a reserve market diagram (reserve supply and reserve demand) locating the point associated with the actual federal funds rate on 1976-04-01 as point A. We don't know what value reserve supply is so just label as RS. Now assuming a stable reserve demand curve, explain and show what the Fed would have had to do to obtain the federal funds rate implied by the Taylor rule. Label this point as point B.

FF - the federal funds rate
PCE INF = PCE inflation
PCE CORE = the core rate of PCE inflation
GDP = real GDP
GDP POT = potential GDP
UR = the unemployment rate
GDP and PCE inflation table
DATES
FF
PCE INF PCE CORE
GDP
GDP POT
UR
1974-04-01 11.25
10.0
7.1
5425.4
5404.6
5.2
1974-07-01 12.09
11.0
8.7
5372.8
5455.0
5.6
1974-10-01
9.35
11.5
9.9
5351.4
5505.2
6.6
1975-01-01
6.30
10.3
10.1
5286.7
5554.2
8.3
1975-04-01
5.42
8.6
9.1
5327.4
5601.5
8.9
1975-07-01
6.16
7.8
7.7
5415.5
5648.2
8.5
1975-10-01
5.41
6.8
6.8
5488.5
5694.4
8.3
1976-01-01
4.83
6.0
6.3
5612.4
5739,8
7.7
1976-04-01
5.20
5.6
6.0
5654.8
5784.9
7.6
1976-07-01
5.28
5.2
6.0
5683.6
5830.4
7.7
1976-10-01
4.87
5.1
6.0
5726.2
5876.9
7.8
1977-01-01
4.66
5.8
6.1
5792.9
5925.7
7.5
1977-04-01
5.16
6.8
6.5
5906.6
5976.7
7.1
1977-07-01
5.82
6.8
6.6
6011.1
6029.3
6.9
1977-10-01
6.51
6.6
6.5
6011.7
6083.6
6.7
1978-01-01
6.76
6.5
6.4
6032.6
6140.0
6.3
1978-04-01
7,28
6.8
6.6
6267.2
6199,7
6.0
1978-07-01
8.10
7.1
6.7
6328.5
6259.8
6.0
1978-10-01
9.58
7.6
7.0
6413.3
6319.5
5.9
1979-01-01
10.07
7.8
6.8
6426.1
6377.2
5.9
We are using data from 1976-07-01 to answer this question.

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