Calculate what would happen to the real interest rate

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Reference no: EM131904288

Use the following Taylor rule to calculate what would happen to the real interest rate if inflation increased by 5 percentage points.

Target federal funds rate = 2 + Current inflation + 1/2 (Inflation gap) + 1/2(Output gap)

Instructions: Round your answers to one decimal place.

If inflation goes up by 5 percentage points, the target federal funds rate goes up by ______ percentage points (______ percentage points due to the direct impact of inflation and another______ percentage points due to an increase in the inflation gap).

According to the Fisher equation, if the nominal rate increased by______ percentage points and inflation increased by_______ percentage points, the real interest rate must have increased by_______ percentage points.

Reference no: EM131904288

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