In the Taylor rule, does the target for the federal funds rate respond differently for a recession caused by a decrease in aggregate demand and for a recession caused by a decrease in short-run aggregate supply? Explain whether there is or is not a
difference in how the target for the federal funds rate changes.
The target for the federal funds rate responds differently. The output gap is negative with both recessions, but the current inflation rate and the inflation gap differ. The decrease in short-run aggregate supply will increase current inflation and the inflation gap (current inflation rate minus the target inflation rate). The decrease in aggregate demand will decrease both current inflation and the inflation gap. The target for the federal funds rate will be higher for the recession caused by a decrease in short-run aggregate supply.
You might also like to view...
What does it mean for a good to be nonexcludable?
What will be an ideal response?
The largest quota subscriber of the International Monetary Fund (IMF) is
A) Japan. B) Germany. C) the United States. D) China.
Barbie is deciding whether to play soccer or go swimming over the next hour. She decides to swim. Economists would conclude that Barbie:
A. is revealing a preference for swimming over soccer. B. will get less utility from swimming during the next hour than playing soccer. C. was unable to play soccer at that time. D. is more skilled at swimming than playing soccer.
Which statement is true?
A. Both craft and industrial unions are organized along the lines of particular skills. B. Neither craft nor industrial unions are organized along the lines of particular skills. C. Craft unions—but not industrial unions—are organized along the lines of particular skills. D. Industrial unions—but not craft unions—are organized along the lines of particular skills.