Question

Use the **Fed rule-of-thumb** to predict how the
Fed would want to change the federal funds rate and the real
interest rate targets for each of the following scenarios if its
estimate of the neutral real interest rate is 2%.

a. A recession hits the economy leading output to be 0.75% below potential output and inflation to fall to 1%.

b. An increase in consumer and business confidence pushes the economy to produce output at 2% above potential output while inflation rises to 3.5%.

**Fed rule of thumb: Federal funds rate - Inflation =
Neutral IR + ½ x (inflation - 2%) + output gap**

ps: for scenario "a" my answer was 3.25

Answer #1

Taking into account FED's thumb rule and givning equal weightage to inflation gap and output gap, Taylor rule stands as: FED target fund rate(i)= Neutral IR(r)+ 0.5* Output Gap+ 0.5*Inflation Gap

Nothing has been mentioned about targeted inflation and Inflation Gap= Expected Inflation-Targeted Inflation

Thus taking targeted inflation to be conventionally 0.

a. i= 2% - 0.5*0.75 % + 0.5*1%= 2.125%, output gap is negative

b. i = 2% + 0.5* 2%+ 0.5* 3.25%= 4.625%

Given the following Taylor rule:
Target federal funds rate = natural rate of interest + current
inflation + 1/2(inflation gap) +1/2(output gap);
Explain what happens to the real interest rate and why it
happens, each time inflation increases
by 1 percent.

Suppose the Fed commits itself to the use of the Taylor rule?
(shown below) to set the federal funds rate. Federal funds rate
equals Long minus run target plus 1.5 left parenthesis Inflation
rate minus Inflation target right parenthesis plus 0.5 left
parenthesis Output gap right parenthesis Suppose the Fed has set
the? long-run target for the federal funds rate at 2.5 percent and
its target for inflation at 3 percent. If the economy is currently
hitting the? Fed's inflation...

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...

Using Taylor's rule, when the equilibrium real federal funds
rate is 2 percent, the positive output gap is 2 percent, the actual
inflation rate is zero, and the target inflation rate is 2 percent,
the nominal federal funds rate should be:
A) 0 percent.
B) 1 percent.
C) 2 percent.
D) 3 percent.

Use the following Taylor rule to calculate what would happen to
the real interest rate if inflation increased by 1 percentage
points.
Target federal funds rate = 2 + Current inflation + 1/2
(Inflation gap) + 1/2(Output gap)
If inflation goes up by 1 percentage points, the target federal
funds rate goes up by ___ percentage points ( ___ percentage points
due to the direct impact of inflation and another __ percentage
points due to an increase in the inflation...

Use the following Taylor rule to calculate what would happen to
the real interest rate if inflation increased by 5 percentage
points. Target federal funds rate = Natural rate of interest +
Current inflation + 1/2(Inflation gap) + 1/2(Output gap)
If inflation goes up by 5 percentage points, the target
(nominal) federal funds rate goes up by ?
percentage points (? percentage points due to the
direct impact of inflation and another ?
percentage points due to an increase in...

Use the following Taylor rule to calculate what would happen to
the real interest rate if inflation increased by 1 percentage
points. Target federal funds rate = Natural rate of interest +
Current inflation + 1/2(Inflation gap) + 1/2(Output gap)
Instructions: Enter your responses rounded to one decimal
place.
If inflation goes up by 1 percentage points, the target
(nominal) federal funds rate goes up by ? percentage points ( ?
percentage points due to the direct impact of inflation...

Suppose that inflation is 2 percent, the Federal funds rate is 4
percent, and real GDP falls 2 percent below potential GDP.
According to the Taylor rule, in what direction and by how much
should the Fed change the real Federal funds rate?

Please Answer in detail.
Go to the St. Louis Federal Reserve FRED database, and find data
on the personal consumption expenditure price index
(PCECTPI), real GDP (GDPC1), an
estimate of potential GDP (GDPPOT), and the
federal funds rate (DFF).
For the price index, adjust the units setting to “Percent Change
From Year Ago” to convert the data to the inflation rate;
For the federal funds rate, change the frequency setting to
“Quarterly.”
Download the data into a spreadsheet.
Assuming the...

8.
Conducting monetary policy so that the federal funds rate = p +
0.5(p – 2) + 0.5 (GDP gap), where the federal funds rate is the
nominal federal funds interest rate, p is the annual inflation
rate, and GDP gap is the percentage shortfall of real GDP from its
natural level, is an example of:
A)
an active policy rule.
B)
a passive policy rule.
C)
discretionary policy.
D)
an automatic stabilizer.

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