The equilibrium real federal funds rate

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Reference no: EM1391367

Suppose that the economy is thought to be 2% above potential ( that is, 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? and how did you come up wth this

Reference no: EM1391367

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