Question

Question 9

The Taylor rule expresses the federal funds rate as the weighted average of:

A. inflation and short-run output

B. the unemployment rate and inflation

C. he misery index, the money growth rate, and the mortgage rate

D. the CPI and real GDP

Question 10

The real exchange rate measures the:

A. number of foreign goods one unit of domestic currency can buy

B. number of foreign goods required to purchase a single unit of a domestic good

C. amount of foreign currency one can get for one unit of domestic currency

D. value of foreign currency denominated in domestic prices

E. relationship between foreign and domestic interest rate

Answer 1

(1)

The Taylor rule expresses the federal funds rate as the weighted average of  inflation and short-run output (or more specifically the inflation gap and output gap)

Below is the formula of a Taylor rule

Taylor rule:

R = r* + π + a(π - π*) + b (Output gap)

where, R = nominal federal funds rate

r* = real federal funds rate.

π = the inflation rate

π* = the target rate of inflation

output gap = % deviation of output from its potential level.

Taylor sets a = 0.5 and b = 0.5

Answer: Option (A)

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(2)

The real exchange rate measures the number of foreign goods required to purchase a single unit of a domestic good.

real exchange rate = Nominal exchange rate * (Foreign price / Domestic price)

Answer: Option (B)