Is the federal funds rate currently too high or too low

Assignment Help Econometrics

Reference no: EM13205291

Suppose that the economy is thought to be 2% above potential (that is, the output gap is 2%) when potential output grows 4% per year. Suppose also that the Fed is following the Taylor rule, with an inflation rate of 2% over the past year. The federal funds rate is currently 3%. The equilibrium real federal funds rate is 3%, and the weights on the output gap and inflation gap are 0.5 each. The inflation target is 1%.

A- Is the federal funds rate currently too high or too low? By how much? Show your work

B- Suppose that a year has gone by, output is now just 1% above potential, and the inflation rate was 1.5% over the year. What federal funds rate should the Fed now set (assuming that the inflation target does not change)?

Reference no: EM13205291

Questions Cloud

What was the amount of the change in autonomous expenditures : Give the amount of the change in the equilibrium level of Real GDP due to a $6 increase in spending on goods and services by households. Give the amount of the change in the equilibrium level of Real GDP due to a $6 increase in spending on goods a..

What is the average total profit generated for the month : What is the highest volume of our highest margin product sold in December, what is the average total profit generated for the month and what is the total number of commercial copiers sold during December

Explain what is the precipitate ksp : A solution contains Ba2+ (1.0x10^-3) and Ca2+ (1.0x10^-3). Drops of a 5.0x10^-1 M solution NaF were added using a buret until the [F-] in the solution mixture reached 1.5x10^-3 M.

Use logic and numerical symbols and operations naturally : Learners who have an ability to understand and use logic and numerical symbols and operations naturally can best be described as which of the following types of learners?

Is the federal funds rate currently too high or too low : Suppose that the economy is thought to be 2% above potential (that is, the output gap is 2%) when potential output grows 4% per year. Suppose also that the Fed is following the Taylor rule, with an inflation rate of 2% over the past year.

Which policy do you think is better in the short run : 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%: %^V= 0.5 X (i-5). Suppose that a model of the economy suggests that the real interest rate is..

What would be the right setting for the federal funds : Policymaking is much easier when the stae of the economy is easily observable than when there is uncertainty about how the economy is doing, as this problem illustrates. Suppose that the economy is either in an expansion or a recession.

Immediate assault against confederate capital of richmond : The Anaconda Plan called for the immediate assault against the Confederate capital of Richmond, Virginia. In the midst of the Civil War, the staunchest supporters of the Confederate government were the southern planters

State the volume of a mass of gas : The volume of a mass of gas is 950 ml at 700 torr pressure. What volumw will it occupy at 350 torr,the temperature

User Account

All Pages