Question

Use the Taylor Rule (equation) to show what the Federal Reserve would do to the Federal Funds rate if, A) prices fall, and B) unemployment falls.

Answer #1

Taylor rule states that there is a positive relationship between inflation (increased price levels) and nominal interest rates. As a rule, it states that if there is one percentage point increase in inflation, the increase in nominal interest rate would be greater than one percentage point.

1. If prices fall: With a fall in prices or deflation, the Fed should reduce the nominal interest rate

2. Unemployment falls: Unemployment and inflation are usually inversely related (as stated in Phillips curve). When unemployment falls, it is usually related with an increase in price levels. As inflation rises, the Fed would also increase the interest rate.

ccording to the Taylor rule, under what macroeconomic
circumstances should the Federal Reserve raise its federal funds
rate target? Please defend your reasoning.

Is
the Federal Reserve guided by Taylor Rule during the Covid-19
outbreak?

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...

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...

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...

17. The Taylor Rule is
a type of discretionary policy.
an activist policy that suggests a target for the Federal Funds
rate based on economic conditions.
an activist policy that suggests a target for the inflation rate
based on economic conditions.
a non-activist rule that suggests a constant rate of money
growth regardless of economic conditions.
18. Over short periods of time, A. real GDP growth is
stable.
B. velocity of money is stable.
C. growth in velocity is volitile....

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...

2. When the Federal Reserve announces an increase in the federal
funds rate, how would bond prices react to the monetary policy
action, i.e., increase, decrease, or stay put?

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