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Business cycle expansion or recession

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Reference no: EM133081070

1. In the fourth quarter of 1982, economic statistics showed the following:

Real GDP : $5,189.8 billion

Unemployment rate : 10.7%

Inflation rate : 3.4%

The conceptual variables corresponding to these data are:

Potential output : $5,640.3 billion

Natural rate of unemployment : 6.1%

Ideal inflation rate : 2.0%

a) Calculate the output gap. Does it represent a business cycle expansion or recession? Explain.

b) Calculate the unemployment gap.

c) Calculate the inflation gap.

2. Suppose the Fed follows the Taylor rule. Suppose the inflation target is 2 percent, the equilibrium real interest rate is 2 percent, the current inflation rate is 4 percent, the weight on the GDP gap is 0.3, the weight on the inflation gap is 0.7 and real GDP is 2 percent above the potential level. What should be the target federal funds rate? If actual output is USD 16 trillion, what is the value of potential output? Show all your work.

Reference no: EM133081070

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