Calculate the optimal money growth rate needed for the fed

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Suppose that the Fed's inflation target is 2%, potential output growth is 3.5%, and velocity is a function of how much the interest rate differs from 5%: % triangle v=0.5x(i-5) Suppose that a model of the economy suggests that the real interest rate is determined by the equation: r =8.5-% triangle Y where Y is the level of output, so %triangleY is the growth rate of output. Suppose that people expect the Fed to hit its inflation target. A: Calculate the optimal money growth rate needed for the Fed to hit its inflation target in the long run.

Reference no: EM13150883

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