Question

Use the Taylor rule to predict the Fed funds rate in each of the following situations. a. Inflation is 3 percent, the inflation target is 4 percent, and output is 3 percent below potential. Instructions: Enter your response rounded to one decimal place. percent b. Inflation is 4 percent, the inflation target is 3 percent, and output is 3 percent above potential. Instructions: Enter your response rounded to one decimal place. percent c. Inflation is 4 percent, the inflation target is 3 percent, and output is 3 percent below potential. Instructions: Enter your response rounded to one decimal place. percent

Answer #1

a. Inflation is 3 percent, the inflation target is 4 percent, and output is 3 percent below potential.

nominmal rate = 2% + inflation + 0.5(inlfation - target inflation) + 0.5 log (real output- potential output

r = 2 + 3 + 0.5 (3-4) + 0.5 log x - log3

r = 5-0.5-0.477 = 4.0%

b. Inflation is 4 percent, the inflation target is 3 percent, and output is 3 percent above potential.

r = 2 + 4 + 0.5 (4-3) + log 3

= 6 + 0.5 + 0.477 = 7.0%

c. Inflation is 4 percent, the inflation target is 3 percent, and output is 3 percent below potential.

r = 2 + 4 + 0.5 (4-3) - log 3

= 6 + 0.5 - 0.477 = 6.0%

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