Federal Inflation Rate, Business Economics

Assignment Help:
Numerical Exercise 11.
Suppose that 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 x (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?

Related Discussions:- Federal Inflation Rate

Scarcity and original cost, define scarcity and opportunity cost? what rol...

define scarcity and opportunity cost? what role these two concepts play in the making of decision making?

How does social capital influence development, How does social capital infl...

How does social capital influence development? Problem: Low social capital leads to potential conflicts and high transaction costs which hinder growth. Several LDCs (Less Deve

Major area of decision making, What are the major area of decision making ?...

What are the major area of decision making ? How does economic theory contribute to managerial decision ?

GDP, GDp of World?

GDp of World?

How can the savings gap be plugged, How can the savings gap be plugged? ...

How can the savings gap be plugged? Low savings are a barrier type to growth. All developing countries have low incomes therefore low savings. A savings gap can be met through

Colonial background countries of the development process, What are colonial...

What are colonial background countries of the development process? A colony is a country controlled by other. Various European countries had extensive empires as: • Latin

Payback method to analyse business , The managing director of Christine plc...

The managing director of Christine plc, a company which specialises in acquiring small businesses, has considered the following potential investments. Only one of these investments

Business assignment, Ask question #. Explain why under fixed exchange rates...

Ask question #. Explain why under fixed exchange rates the monetary policy is not effective#

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd