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Based on the Taylor Rule use the following information to calculate the target federal funds rate.


Based on the Taylor Rule use the following information to calculate the target federal funds rate.

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 In this case, the Federal funds target rate is _______ percent. 

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Answer #1

Solution :-

Federal funds target rate =

= Real Equilibrium Federal Funds Rate + Current Inflation + 0.5*(inflation gap) + 0.5*(Output gap)

Where Inflation gap = Current Inflation rate - target inflation rate = 8% - 2% = 6%

Now federal funds target rate =

= 2% + 8% + (0.5 * 6%) + (0.5 * 9%)

= 17.5%

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