please answer Question 7:
please answer Question 7: Inflation targeting and the Taylor rule in the IS-LM model Consider a...
6. 7. Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation, and Yn...
6. 7. Inflation targeting and the Taylor rule in the IS-LM model Consider a closed economy in which the central bank follows an interest rate rule. The IS relation is given by Y C(Y- T) I(Y,r) G Where r is the real interest rate. The central bank sets the nominal interest rate according to the rule i = i* + a(n° =- T*) + b(Y- Y1) Where T is expected inflation, T* is the target rate of inflation, and Yn...
1. (The IS-LM-PC model): Assume the following relations characterize the goods market: (i) 1128 +0.2Y 300(rt + xt) (iii)G,-215 :T t = 200 (iv)st= 0.15 or 15% e) Derive the IS curve (as a relation between Y and r). (b) Assume the LM curve is given by r 0.16 (ie. in period t, the central bank sets the real interest rate at 16%). What is the short-run equilibrium level of output (Yt )? (c) Suppose that L = 2000 and...
10. The Taylor rule. Using the Taylor rule, for an inflation target of 2%, an equilibrium real interest rate of 2%, m-1, and inflation of 5%, what is the nominal interest rate according to the policy rule.
Suppose the central bank, instead of following the rule r = r(Y,π), has a target level of inflation. Specifically, it sets r according to r = rLR + b[π − π*]. Here rLR is the real interest rate when the economy is in long-run equilibrium; that is, it is the real interest rate that causes the loan market to be in equilibrium when Y = �Y. In addition, π* is the central bank’s target level of inflation, and b is...
Use the following Taylor rule to calculate what would happen to the real interest rate if inflation increased by 7 percentage points. Target federal funds rate = Natural rate of interest + Current inflation + 1/2(Inflation gap) + 1/2(Output gap) Use the following Taylor rule to calculate what would happen to the real interest rate if inflation increased by 7 percentage points. Target federal funds rate = Natural rate of interest + Current inflation + 1/2(Inflation gap) + 1/2(Output gap)...
14) Suppose the AE curve is mis-measured such that the Central Bank under- estimates the effects of interest rates on expenditure. The economy starts off at Y* and TT and then experiences an adverse supply shock. The Central Bank follows non-accommodative policy using the incorrectly measured AE curve. For simplicity assume there are no lags. This leaves the economy in which of the following states? a) Recession; inflation above target b) Recession; inflation below target c) Expansion; inflation above target...
Given the Taylor Rule, if nominal inflation is 4.3%, the FED target inflation rate is 2%, the real Fed Funds rate is 0.7%, the log of real output is 3.0155, and the log of potential output is 3.0445; what should the be the FED’s Fed Funds target rate?
1. Given the Taylor Rule, if nominal inflation is 4.3%, the FED target inflation rate is 2%, the real Fed Funds rate is 0.7%, the log of real output is 3.0155, and the log of potential output is 3.0445; what should the be the FED's Fed Funds target rate?
Assume that the economy of Cranberry Republic is characterized by the following IS-LM-PC model: Phillips curve: 7 = The + 0.0006(Yt-Yn) where it is the inflation rate at year t, ze is the level of inflation that people expect at the beginning of yeart, Yt is the actual level of output and Yn is the potential output. IS equation: Y = 1,450 -5,000 rt LM equation: 14 = Suppose that people form their expectation according to: TT = Tt-1 a....