Economics (7th Edition) (What's New in Economics)
7th Edition
ISBN: 9780134738321
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 26, Problem 26.5.5PA
To determine
Calculation of Federal funds rate by Taylor rule.
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Suppose that the equilibrium real federal funds rate is 6 percent and the target rate of inflation is 1 percent. Use the following information and the Taylor rule
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Current inflation rate 2 percent
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The federal funds target rate is%. (Enter your response rounded to two decimal places)
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Chapter 26 Solutions
Economics (7th Edition) (What's New in Economics)
Ch. 26 - Prob. 26.1.1RQCh. 26 - Prob. 26.1.2RQCh. 26 - Prob. 26.1.3RQCh. 26 - Prob. 26.1.4PACh. 26 - Prob. 26.1.5PACh. 26 - Prob. 26.1.6PACh. 26 - Prob. 26.1.7PACh. 26 - Prob. 26.2.1RQCh. 26 - Prob. 26.2.2RQCh. 26 - Prob. 26.2.3RQ
Ch. 26 - Prob. 26.2.4RQCh. 26 - Prob. 26.2.5RQCh. 26 - Prob. 26.2.6PACh. 26 - Prob. 26.2.7PACh. 26 - Prob. 26.2.8PACh. 26 - Prob. 26.2.9PACh. 26 - Prob. 26.2.10PACh. 26 - Prob. 26.3.1RQCh. 26 - Prob. 26.3.2RQCh. 26 - Prob. 26.3.3RQCh. 26 - Prob. 26.3.4PACh. 26 - Prob. 26.3.5PACh. 26 - Prob. 26.3.6PACh. 26 - Prob. 26.3.7PACh. 26 - Prob. 26.3.11PACh. 26 - Prob. 26.3.12PACh. 26 - Prob. 26.3.13PACh. 26 - Prob. 26.3.14PACh. 26 - Prob. 26.3.15PACh. 26 - Prob. 26.4.1RQCh. 26 - Prob. 26.4.2RQCh. 26 - Prob. 26.4.3PACh. 26 - Prob. 26.4.4PACh. 26 - Prob. 26.4.5PACh. 26 - Prob. 26.4.6PACh. 26 - Prob. 26.5.1RQCh. 26 - Prob. 26.5.2RQCh. 26 - Prob. 26.5.3RQCh. 26 - Prob. 26.5.4PACh. 26 - Prob. 26.5.5PACh. 26 - Prob. 26.5.6PACh. 26 - Prob. 26.5.7PACh. 26 - Prob. 26.5.8PACh. 26 - Prob. 26.5.9PACh. 26 - Prob. 26.6.1RQCh. 26 - Prob. 26.6.2RQCh. 26 - Prob. 26.6.3PACh. 26 - Prob. 26.6.4PACh. 26 - Prob. 26.6.5PACh. 26 - Prob. 26.6.6PACh. 26 - Prob. 26.6.7PACh. 26 - Prob. 26.6.8PACh. 26 - Prob. 26.6.9PACh. 26 - Prob. 26.2RDECh. 26 - Prob. 26.3RDE
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- Assume the following: Current Actual Inflation Rate = 2% Potential Real GDP = 100,000 Actual Real GDP = 100,000 According to the Taylor Rule, the Fed should set the federal funds rate at percent. In that case, the real federal funds rate will equal Let this be our base case scenario. According to Taylor, what will happen to the inflation rate in this case? percent.arrow_forward# Based on the Taylor Rule use the following information to calculate the target federal funds rate. Variable Target inflation rate Current inflation rate Real equilibrium federal funds rate Output gap In this case, the Federal funds target rate is: percent. (Round your solution to one decimal place.) Value 2 percent 5 percent 2 percent 1 percentarrow_forwardCheck my work 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? Instructions: Enter your answer as a whole number. The Fed should decrease the federal funds rate by percent. 26 of 29 Next > < Prev MacBookarrow_forward
- Consider the Money Demand Function. a) briefly describe the effect of an increase in Expected inflation on money demand.arrow_forwardSuppose that the current real federal funds rate in the economy is 2.0%, the current inflation rate is 1.0%, the Federal Reserve's target inflation rate is 2.0%, and the output gap is –2.0%. According to the Taylor Rule, how much should be the Federal Reserve's target federal funds rate? Please show your work. [Hint: According to the Taylor Rule, the FF Target = Real FF Rate + Inflation Rate + 0.5 (Inflation Gap) + 0.5 (Output Gap)].arrow_forwardSuppose the inflation rate target is zero and the long-run federal funds target is also zero. If the inflation rate is 4 percent and the output gap is ‒2 percent, the federal funds rate set by the Taylor rule is ________. 5 percent 6 percent 2 percent 8 percent Robert is a doctor who earns an average hourly wage of $80. His wife is a teacher and earns an average hourly wage of $35. His daughter works in her college library and earns $12 per hour, while his son is a lawyer and earns $60 per hour. If one of them must stay at the house on a working day to look after their ailing pet, who can do it at the lowest opportunity cost? Robert Robert's wife Robert's daughter Robert's son Edward lives in England, and he makes a donation of $100,000 to a charitable organization in the United States. Edward's donation will be considered ________. a subsidy foreign aid a transfer payment to foreigners a factor payment to foreigners Everything else equal, if a country has exports of $15…arrow_forward
- Using the Taylor rule, calculate the target for the federal funds rate, using the following information: equilibrium real federal funds rate of 2%, target inflation rate of 2%, current inflation rate of 1.2% and an output gap of 5.9%. In your calculations the inflation gap is negative if the current inflation rate is below the target inflation ratearrow_forwardK Suppose that the equilibrium real federal funds rate is 4 percent and the target rate of inflation is 1 percent. Use the following information and the Taylor rule to calculate the federal funds rate target: Current inflation rate = 6 percent Potential real GDP = $14.28 trillion Real GDP $14.29 trillion = The federal funds target rate is % (Enter your response rounded to two decimal places.)arrow_forwardBased on the Taylor Rule use the following information to calculate the target federal funds rate. Variable Value Target inflation rate Current inflation rate 2 percent 4 percent 2 percent Real equilibrium federal funds rate Output gap 6 percent In this case, the Federal funds target rate is: percent. (Round your solution to one decimal place.)arrow_forward
- Assume the following: Current Actual Inflation Rate = 6% (like these days) Potential Real GDP=100,000 Actual Real GDP = 100,000 According to the Taylor Rule, the Fed should set the federal funds rate at percent. In that case, the real federal funds rate will equal percent.arrow_forwardSuppose that the equilibrium real federal funds rate is 2.5% and the target inflation rate is 1.5%. If the current inflation is 3.25% and the output gap is 3.6%, use the Taylor rule to find the federal funds rate that the Fed should choose. Show your work below.arrow_forwardWhat Can the Fed Do about Inflation? In the article by Thomas Hogan, we learn that Russia's invasion of the Ukraine nor the shortage or supply chain issues has not derived the main causes of inflation. (Hogan, 2022) The main cause for the issues that we have been facing come directly from the constant price changes and the monetary policy that is currently in place. We learn that with Federal Open Market Committee (FOMC) has not adjusted their monetary policy, and have been raising the rates in such small increments that is causing the inflation to continue in an upward trend. What needs to occur is the FOMC needs to raise interest rates in greater scales in order the combat the inflation that is taking place and stabilize the price levels that are out there. (Hogan, 2022) What needs occur is that the Fed needs to come up with a policy that will allow for a predetermined path that slows down and regulating the money growth back to a safe place. Having the guidance from the article…arrow_forward
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