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Answer the questions in the given space below. Any sloppy work will not be graded Problem 1. (40 points) a. Write down the ex

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Answer #1

As per the Taylor Rule, the Federal Reserve should increase the rates when inflation is more than the target rate or when the growth of gross domestic product (GDP) is very high. This also works vice versa that is Fed should decrease the rates when inflation is below the target level or growth of GDP is too slow. This rule was given by John Taylor in 1992 and is basically an interest rate forecasting model.

According to Taylor, the nominal interest rate should respond to the difference between actual inflation rates and target inflation rates and between actual Gross Domestic Product (GDP) and potential GDP:

The answers to a, b and c are attached below:

Andre Expression for Taylor Rule (a) i = 7e + us to content) +g (2-3) here if = target shout town nomine interest rate (feder

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