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 be4% . 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 $14.00 trillion. However, the actual GDP in the United States is $12 trillion. Assuming that the inflation rate is still 4%, the Taylor Rule prescribes that the federal funds Expert Answer
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 be4% . 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 $14.00 trillion. However, the actual
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