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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%,

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Answer #1

Operating target for FFR = current inflation rate + equilibrium real FFR + 0.5*(current inflation - 0.02) +

0.5*(log of real GDP - log of potential GDP)

= 0.02 + 0.007 + 0.5*(0.043 - 0.02) + 0.5*(3.0155 - 3.0445)

= 2.4%

Hence target FFR is 2.4%

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