ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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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 and another____percentage points due to an increase in the inflation gap).
Consider the Fisher equation. Given the increase in the nominal interest rate you just calculated and the 1 percentage point increase in inflation we started with, the real interest rate must have increased by ____ percentage points
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