Suppose that the equilibrium real federal funds rate is 2.5% and the target inflation rate is 2.5%. If the current inflation is 6.25% and the output gap is -2.3%, use the Taylor rule to find the federal funds rate that the Fed should choose. Show your work.

Suppose that the equilibrium real federal funds rate is 2.5% and the target inflation rate is 2.5%. If the current inflation is 6.25% and the output gap is -2.3%, use the Taylor rule to find the federal funds rate that the Fed should choose. Show your work.

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter14: Money And The Economy

Section: Chapter Questions

Problem 8QP

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10. Suppose that the equilibrium real federal funds rate is 2.5% and the target inflation rate
is 2.5%. If the current inflation is 6.25% and the output gap is -2.3%, use the Taylor
rule to find the federal funds rate that the Fed should choose. Show your work.

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