Is the federal funds rate currently too high or too low

Reference no: EM13221177

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

a Is the federal funds rate currently too high or too low? By how much?

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

Reference no: EM13221177

Questions Cloud

How managers would use the cost-benefit analysis : Provide a cost-benefit analysis for a company which has to decide whether to hire more staff or hire temporary workers to meet production schedules. Determine how managers would use your cost-benefit analysis to make this decision.

What is the impact to future cash-flows that may emerge : With the current U.S. economy in a weakened state, many companies are reluctant to implement any capital improvements or capital expenditures in fear of the economic uncertainty that exists that may negatively impact the cash-flow of the organizat..

Compute the number of grams of urea : Calculate the number of grams of urea that must be added to 150 g water to give solution whose vapor pressure is 2.5 mmHg less than that of pure water at 40 degrees C

One gram of limestone decomposes how much heat is evolved : Limestone, CaCo3, when subjected to a temperature of 900 degrees Celsius in a kiln, decomposes to calcium oxide and carbon dioxide. How much heat is evolved or absorbed when one gram of limestone decomposes?

Is the federal funds rate currently too high or too low : when potential output grows 4 percent per year. Suppose also that the Fed is following the Taylor rule, with an inflation rate of 2 percent over the past year. The federal funds rate is currently 3 percent.

Calculate optimal money growth rate needed for fed : a Calculate the optimal money growth rate needed for the Fed to hit its inflation target in the long run. b In the short run, if output growth is just 2 percent for two years and the equation determining the real interest rate changes to r = 4.5 - ..

Discuss the basics of just-in-time using an example : Discuss the basics of Just-in-Time using an example from the industry. Further, justify whether Just-in-Time is an inventory control policy or a process improvement methodology. Also, examine if it can be both.

Different methods for evaluating projects and rank portfolio : Assess and explain the advantages and disadvantages of the different methods for evaluating projects and rank portfolios. Discuss how project evaluations can be used to make decisions on individual projects-especially in the termination of project..

Explain loss of water and a heat capacity : A 455-g piece of copper tubing is heated to 89.5 Celcius and placed in an insulated vessel containing 159g of water at 22.8 degrees Celcius. Assuming no loss of water and a heat capacity of 10.0 J/K for the vessel, what is the final temerature? (c..

User Account

All Pages