Question

Assignment Score: Due: Fri, Jul 2 58.5% Resources Give Up? Feedback < Question 2 of 20 Resume empts Attempt 1 Monetary Policy-End of Chapter Problems ess Use the Fed rule-of-thumb to predict the Fed's target for the federal funds rate for each of the following scenarios if its estimate of the neutral real interest rate is 2%. a. A recession hits the economy, causing output to fall to 0.75% below potential output and inflation to fall to 1%. Predicted federal funds rate: ass -375 % Incorrect b. An increase in consumer and business confidence pushes output to 2% above potential output, while inflation rises to 3.5%. Predicted federal funds rate: 1 Incorrect

Answer 1

Q2) The taylor rule is as follows:

Fed funds rate = inflation + neutral real interest rate + 0.5(inflation - expected inflation) + 0.5(output - potential output)

(a)

Fed funds rate = 1 + 2 + 0.5(1-2) + 0.5(-0.75)

= 3 - 0.5 - 0.375

= 2.125

(b) Fed funds rate = 3.5 + 2 + 0.5(3.5 -2) + 0.5(2)

= 5.5 + 0.5*1.5 + 1

= 7.25