What money growth rate should the fed aim for to hit

Reference no: EM13221012

If the Fed's inflation target is 2 percent, potential output growth is 3.5 percent, and velocity is a function of how much the interest rate differs from 5 percent: % ? V - 0.5 A (i - 5) Suppose that a model of the economy suggests that the real interest rate is determined by the equation r = 8.5 - % ? Y where Y is the level of output, so % ? Y is the growth rate of output. Suppose that people expect the Fed to hit its inflation target.

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 - %? Y, what money growth rate should the Fed aim for to hit its inflation target in that period?

c If the Fed instead maintained the money growth rate from part a, what is likely to happen to inflation?

d Which policy do you think is better in the short run? Which is better in the long run?

Reference no: EM13221012

Questions Cloud

What is lost when no feedback is required : What is lost when no feedback is required?

Which receives a fee when it directs newly procured organ : If the formerly "free" organ now has a price placed upon it, then that will drive up the total costs for having organ transplants, thus making such operations more expensive and, therefore, out of reach for lower-income people.

Describe the areas where you see yourself lacking : From the e-Activity, briefly describe your results from the communication skills quiz. Describe the areas where you see yourself lacking or needing improvement as a communicator, and suggest steps you could take to improve or fill a void.

Explain possible reasons why consolidations and mergers : Explain possible reasons why consolidations, mergers, and acquisitions occur for hospital and other healthcare organizations and the capital challenge for such ventures.

What money growth rate should the fed aim for to hit : If the Fed's inflation target is 2 percent, potential output growth is 3.5 percent, and velocity is a function of how much the interest rate differs from 5 percent: % ? V - 0.5 A (i - 5) Suppose that a model of the economy suggests

Discuss and explain the various categories of costs : Discuss and explain the various categories of costs needed in forecasting expenses to achieve a desired financial planning for effective decision making.

Hr professionals support line managers and staff : Identify at least three ways HR activities support an organisation to meet its goals and business objectives and support line managers and their staff

Compute the experimental value of the van''t hoff factor : 9.92 grams of a compound with a molar mass of 124.0 grams/mole when dissolved in 150.0 grams of water gave a solution which had a freezing point of -2.69 °C. Calculate the experimental value of the van't Hoff factor.

Describe the relationship between financial forecasting : Describe the relationship between financial forecasting for financial planning and for strategic planning, with a focus on describing the key requirements for effective financial planning and policy making.

User Account

All Pages