Suppose the economy is thought to be 2 percent above potential (i.e., the output gap is 2 percent), when potential output grows 4 percent per year. Suppose the Fed is following the Taylor rule, with an inflation rate of 2 percent over the past year. The federal funds rate is currently 3 percent. The equilibrium real fed funds rate is 3 percent and the weights on the output gap and inflation gap are 0.5 each. The inflation target is 1 percent.
a.Is the fed funds rate currently too high or too low? By how much? Show your work. b.Suppose a year has gone by, output is now just 1 percent above potential, and inflation rate was 1.5 percent over the year. What federal funds rate should the Fed now set (assuming the inflation target does not change)?
What will be an ideal response?
Use the equation i = r* + ? + {w1× [(Y?Y*)/Y*] × 100} + [w2× (???T)].a.i = r* + ? + {w1× [(Y?Y*)/Y*] × 100} + [w2× (???T)] = 3% + 2% + (0.5 × 2%) + (0.5 × 1%) = 6.5%. So the fed funds rate is currently too low by 3.5 percentage points. b.i = r* + ? + {w1× [(Y?Y*)/Y*] × 100} + [w2× (???T)] = 3% + 1.5% + (0.5 × 1%) + (0.5 × 0.5%) = 5.25%.
You might also like to view...
Each time a politician or celebrity writes a book, bookstores can expect at least some customers to want the book, but whether or not it will become a best-seller is less certain. The bookstore's primary inventory management challenge is
A. which other books to promote along with this book. B. having enough books to satisfy customer demands versus the cost of having the inventory. C. whether or not to display the book at the checkout counter. D. whether to price the books in the distribution center or at the retail store. E. how to get the author to sign copies of the book.
During a brainstorming session, Gracie asked for clarification of one of George’s solutions to the problems at hand. Gracie was violating which rule of brainstorming?
A. don’t evaluate ideas B. don’t clarify ideas C. encourage zany ideas D. expand on others’ ideas
Coding unstructured questions is relatively simple, since the response options are predetermined
Indicate whether the statement is true or false
Clinton Manufacturing uses a predetermined overhead allocation rate based on direct labor costs. The following are the details of production during the year:
Calculate the amount of manufacturing overhead costs allocated to production. (Round any percentages to two decimal places and your final answer to the nearest dollar.)
A) $150,000
B) $164,571
C) $154,296
D) $160,000