Suppose that in 1980, the U.S. inflation rate was 13.5 percent and the unemployment rate reached 7.8 percent. Suppose that the target rate of inflation was 3 percent back then and the full-employment rate of unemployment was 5.5 percent at that time. What value does the Taylor Rule predict for the Fed’s target interest rate?

When the Fed decreases the discount rate, banks are likely to the money supply their lending and A) increase; increases B) increase; decreases C) decrease; increases D) decrease; decreases

Suppose that inflation is 2 percent, the federal funds rate is 4 percent, and real GDP is 5 percent above potential GDP. According to the Taylor rule, in what direction and by how much should the Fed change the real federal funds rate?   SEE PICTURE!!

Which of the following is NOT a function of the Fed? OPTIONS: Regulating the money supply Holding reserves for depository institutions Lending funds to credit-worthy private firms Supervising member banks

Why do Fed policies aim to keep the level of interest rates low in recent years? How have those rates shaped employment, income, and prices? Could these low U.S. interest rates cause an inflation?

Assume the inflation rate is 6% and there is every indication that price levels will continue to rise. The Fed should engage in which policy with respect to open market operations: Buy bonds Sell bonds. Increase reserve ratio Decrease reserve ratio

According to the Taylor Rule, if inflation rises by 2%, then the targeted interest rate should rise by more than 2%.  Select one: True False

A) Using the original Taylor Rule where the equilibrium real rate of interest is estimated to be 2% and the target inflation rate is 2%, what is the federal funds rate implied by the Taylor Rule? b) Using the Mankiw Rule, what is the federal funds rate implied by the Mankiw Rule? c) According to the Taylor Rule, was the Fed being hawkish or dovish during this period? Explain and be specific with numbers. d) Relate your answer in part c) to the work done by Kydland and Prescott. e) Draw a reserve market diagram (reserve supply and reserve demand) locating the point associated with the actual federal funds rate on 1976-04-01 as point A. We don't know what value reserve supply is so just label as RS. Now assuming a stable reserve demand curve, explain and show what the Fed would have had to do to obtain the federal funds rate implied by the Taylor rule. Label this point as point B.

The primary instrument of monetary policy for the Fed is the discount rate.     True   False

Fed target interest rate = real risk free interest rate + current actual inflation rate + 0.5 x (inflation gap) – 1.0 x (unemployment gap) The Taylor Rule is based on economists' widely held belief that central bankers are willing to tolerate modest positive rates of ( inflation, unemployment ) if doing so will help to generate ( low inflation, full employment ). To capture that preference, in the Taylor rule equation, the coefficient on the inflation gap is 0.5 while the coefficient on the unemployment gap is This reflects the fact that policymakers care ( less, more ) about the unemployment gap than they care about the inflation gap. That is, they are assumed to care two times ( less, more ) about the unemployment gap than the inflation gap. The Fed has ( an official, no official ) allegiance to this rule. They ( are, are not ) free to change interest rates however they deem appropriate.