Write out the expression for the Taylor rule. Use the Taylor rule to explain how a decline in real GDP below potential GDP will affect the Federal Reserve's target for the federal funds rate
What will be an ideal response?
The Taylor rule states that the Fed should set the federal funds target so that it is equal to: the real equilibrium federal funds rate + the current inflation rate + (w1 ) × inflation gap + (w2 ) × output gap. The inflation gap is the difference between the current inflation rate and the target rate. The output gap is the percentage difference between real GDP and potential GDP. The values w1 and w2 are weights determined by the Fed. If the growth rate in real GDP is below potential GDP, then the output gap will be negative. This will lower the federal funds target.
You might also like to view...
A perfectly contestable market is one which a firm can enter and exit without losing its investment
a. True b. False Indicate whether the statement is true or false
Which of the following contributes most to the reduction in income inequality?
A. Taxes B. Wealth C. Transfer payments D. Earned income tax credits
The price that a firm's only competitor charges would be a
a. topic in microeconomics b. topic in finance c. macroeconomic topic d. topic in public finance e. normative issue
Compute the tax rates for the three taxpayers shown in Table 33.1. Then use the table to answer the indicated question.TaxpayerIncome (Dollars)Taxable Income (Dollars)Taxes Paid (Dollars)Effective Tax Rate(Percent)Nominal Tax Rate(Percent)1$200,000$100,000$6,000________%________%2100,00080,0008,000________%________%360,00048,00012,000________%________%In Table 33.1, the effective tax rate for taxpayer 1 is
A. 8.0 percent. B. 50.0 percent. C. 6.0 percent. D. 3.0 percent.