Reference no: EM133080328

We are using data from 1975-07-01 to answer this question.

a) Using the original Taylor Rule where the equilibrium real rate of interest is estimated to be 2% and the target inflation rate is 2%, what is the federal funds rate implied by the Taylor Rule?

b) Using the Mankiw Rule, what is the federal funds rate implied by the Mankiw Rule?

c) According to the Taylor Rule, was the Fed being hawkish or dovish during this period? Explain and be speci?c with numbers.

d) Relate your answer in part o) to the work done by Kydland and Presoott.

e) Draw a reserve market diagram (reserve supply and reserve demand) locating the point associated with the actual federal funds rate on 197'6-07-01 as point A. We don't know what value reserve supply is so just label as RS. Now assuming a stable reserve demand ourve, explain and show what the Fed would have had to do to obtain the federal funds rate implied by the Taylor rule. Label this point as point B.