Given the following Taylor rule:Target federal funds rate = natural rate of interest + current inflation + 1/2(inflation gap) + 1/2(output gap);Since the coefficients on the inflation and output gaps are equal, does this mean the central bank will respond to a one percent increase in inflation with the same change in the target rate as they would initiate from a one percent increase in the output gap? Explain.
What will be an ideal response?
The coefficient on the gaps are the same, however, the rule has a bias toward inflation in that it includes the current rate of inflation as a term. If the rate of inflation increases by 1 percent the target interest rate actually would increase by 1.5 percent since the current inflation rate would be 1 percent higher and the additional 0.5 comes from the inflation gap times 1/2. If the output gap increases by 1 percent the target interest rate will be increased by 0.5 percent.
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If there is a floor on wages created by a minimum wage, union contracts, or other factors, then a decline in the marginal productivity of low-skilled workers will ________ the demand for low-skilled workers and ________ the number of unemployed workers.
A. increase; increase B. decrease; decrease C. increase; decrease D. decrease; increase
If the marginal cost of pollution abatement differs across firms, then regulations that require all polluters to reduce pollution by a fixed proportion will be:
A. fair to all polluters. B. ineffective. C. inefficient D. efficient.
What is meant by the term "long-run competitive equilibrium?
What will be an ideal response?
Classical economists held the view that in the economy:
A. Demand creates its own supply B. Unemployment is temporary and is soon eliminated C. There is an imbalance between saving and investment D. It is difficult for an economy to adjust because wages and prices are inflexible