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ENGR.ECONOMIC ANALYSIS
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 23 For the first time since late 2019, the Federal Reserve has increased the Federal Funds target rate- from 0.25% to 0.5%. The argument of the Chair of the Federal Reserve, Jerome Powell, was that this move was needed to counteract the high infiation rate occurring in the United States. Other economists have argued that since we also have an output gap (actual GDP is below potential GDP), increasing the target rate will further exacerbate this gap. a. Interpret the Federal Funds target rate change with respect to the Taylor Rule. Given that the difference inflation rate gap is much larger than the GDP rate gap, does this change seem sensible? Explain. b. What would be the impact of this interest rate change on GDP? Knowing that this small change in the Federal Funds target rate is unlikely to bring inflation back to the target rate, what does this mean overall for the U.S. economy? (Hint: use a combination of the money supply model, investment model, and AS-AD graph to describe this change).
Transcribed Image Text:QUESTION 23 For the first time since late 2019, the Federal Reserve has increased the Federal Funds target rate- from 0.25% to 0.5%. The argument of the Chair of the Federal Reserve, Jerome Powell, was that this move was needed to counteract the high infiation rate occurring in the United States. Other economists have argued that since we also have an output gap (actual GDP is below potential GDP), increasing the target rate will further exacerbate this gap. a. Interpret the Federal Funds target rate change with respect to the Taylor Rule. Given that the difference inflation rate gap is much larger than the GDP rate gap, does this change seem sensible? Explain. b. What would be the impact of this interest rate change on GDP? Knowing that this small change in the Federal Funds target rate is unlikely to bring inflation back to the target rate, what does this mean overall for the U.S. economy? (Hint: use a combination of the money supply model, investment model, and AS-AD graph to describe this change).
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