Answered: If the economy is currently at full…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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a. If the economy is currently at full employment, at what level should the central bank set the nominal interest rate?

b. At what level should the central bank set the nominal interest rate if the economy is 20% below potential GDP?

c. Explain the difference between the nominal interest rate and the real interest rate. Using these concepts of the nominal interest rate and the real interest rate explain how lenders can protect themselves from any negative effects of inflation if the inflation is fully anticipated.

2. Assume inflation is currently 6% but the inflation target that the central bank has
announced is only 3%. (Hint: Recall in the Taylor rule, a = B = .5 and r* = 2%)
hot level should the central bank set

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