Fed target interest rate = real risk free interest rate + current actual inflation rate + 0.5 × (inflation gap) – 1.0 x (unemployment gap) The Taylor Rule is based on economists' widely held belief that central bankers are willing to tolerate modest positive rates of ( inflation, unemployment ) if doing so will help to generate ( low inflation, full employment ). To capture that preference, in the Taylor rule equation, the coefficient on the inflation gap is 0.5 while the coefficient on the unemployment gap is This reflects the fact that policymakers care ( less, more ) about the unemployment gap than they care about the inflation gap. That is, they are assumed to care two times ( less, more ) about the unemployment gap than the inflation gap. The Fed has ( an official, no official ) allegiance to this rule. They ( are, are not ) free to change interest rates however they deem appropriate.

Fed target interest rate = real risk free interest rate + current actual inflation rate + 0.5 × (inflation gap) – 1.0 x (unemployment gap) The Taylor Rule is based on economists' widely held belief that central bankers are willing to tolerate modest positive rates of ( inflation, unemployment ) if doing so will help to generate ( low inflation, full employment ). To capture that preference, in the Taylor rule equation, the coefficient on the inflation gap is 0.5 while the coefficient on the unemployment gap is This reflects the fact that policymakers care ( less, more ) about the unemployment gap than they care about the inflation gap. That is, they are assumed to care two times ( less, more ) about the unemployment gap than the inflation gap. The Fed has ( an official, no official ) allegiance to this rule. They ( are, are not ) free to change interest rates however they deem appropriate.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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C = 50 + 0.9 · (Y – T) I = 50 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T = 500. The money market equilibrium curve-or LM curve-is where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 10000 units of money, and expected inflation is zº = 0.05. The long-run aggregate supply (LRAS) is Y, = 1000. Suddenly, there is a climate shock that changes the marginal propensity to consume (MPC), and the consumption function changes to C' = 50 + 0.8 · (Y – T). 1. Explain how the short-run values of (r, i) are determined before the climate shock. 2. Which, if any, of the graphs from Appendix A best depicts the short-run change in the interest rate(s) due to the climate shock? Explain. 3. Which, if any, of the graphs from Appendix B best depicts the short-run change in output and price due to the climate shock? Explain. 4. Which, if any, of the graphs from Appendix C best…
A Keynesian economy is described by the following equations. Consumption Cd = 250 + 0.5(Y - T) - 250r Investment Id = 250 - 250r Government purchases G = 300 Government taxes T = 300 Real money demand L = 0.5Y - 500r + πe Money supply M = 3000 Full-employment output Y = 1250 Expected inflation πe = 0 (HINT a: The expected rate of inflation is assumed to equal zero so that money demand depends directly on the real interest rate, which equals the nominal interest rate. Domestic Savings, Sd =Y - C - G. In equilibrium set domestic savings equal to domestic investment, so Sd = Id) Calculate the values of the real interest rate (r), consumption (Cd), and investment (Id) for the economy in general equilibrium.
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%.
) The Fed has increased the target rate of the federal funds rate nine times since December 2015. An increase in the targeted rate implies a reduction in the growth rate of the money supply. Use the rational expectations AD-AS model to show and explain how this policy could affect Y, N, W/P, r, and P in the short and long runs. Use two scenarios: a) Firms accurately anticipate the change in P; b) They initially underestimate the change in P. What are the implications for monetary policy of the rational expectations model? Many critics have said that the Fed's policy move would reduce economic growth. How can their arguments be countered? Note that the Fed has been very public about announcing its policy decisions since 1994.
C = 100 + 0.5 - (Y – T') I = 500 – 1000 -r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, Ť = 100. The LM (money market equilibrium) curve is Y 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to = 0.05. Question 5 Suppose that consumers finally decide to get rid of cash altogether, and only use debit cards. Nothing else changes, and the CB doesn't do anything either. What do you think will happen to money supply M and prices P in the short and long-runs? Does this change money demand?
Consider the following hypothetical scenario: actual GDP is measured to be 3% below potential. Measured unemployment, by most accounts, is thought to be 2% above the natural rate of unemployment. If inflation is relatively low: In this scenario, what would the Federal Reserve most likely do at the next few Federal Open Market Committee (FOMC) meetings? Assuming the Fed follows the policy course you set forth in part (1), what should the Fed be concerned with in the years that follow?
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According to the Taylor Rule, if inflation rises by 2%, then the targeted interest rate should rise by more than 2%. Select one: True False
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.
Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.
C = 100 + 0.5 · (Y – T) I = 500 – 1000 - r where Y is real output and r is the real interest rate. Government purchases and taxes are Ğ = 500, T = 100. The LM (money market equilibrium) curve is MY P 5i where P is the price level and i is the nominal interest rate. The Central Bank (CB) is initially supplying M = 8000 units of money, and expected inflation is a = 0. Assume that the long-run equilibrium level of output is Y = 2000. Short-run equilibrium output is initially at the same level (Y = 2000). Suddenly, news of a new world-beating super-vaccine raises expected inflation to = 0.05. 1. Suppose the government (not the CB) wants to stabilise the shock in the short-run. Explain whether it should increase the government deficit (AĞ > AT) or reduce it (AĞ < AT), and how it works. 2. Now suppose the government doesn't do anything, and the CB wants to stabilise the shock in the short-run. Explain whether it should decrease or increase money supply M if it wants to bring output Y back to…
As per the additional reading “Fed’s response to Inflation Data in Oct 2021”, all the following statements are true EXCEPT Group of answer choices Worker’s wages have risen 4.2% compared to last year. Supply chain bottlenecks are likely to persist in 2022. The Federal Reserve is going to raise interest rates immediately. The Federal Reserve also announced a plan to start winding down another effort it undertook to help the economy through the pandemic: its purchases of at least $120 billion worth of bonds each month.