Federal Funds Rate - 24707

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  • Due on: Wed 11 Sep, 2013 (06:18pm)
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Suppose that the economy is thought to be

2 percent above potential (that is, the output

gap is 2 percent) when potential output grows

4 percent per year. Suppose also that the Fed is

following the Taylor rule, with an inflation rate

of 2 percent over the past year. The federal funds

rate is currently 3 percent. The equilibrium real

federal funds rate is 3 percent, and the weights

on the output gap and inflation gap are 0.5 each.

The inflation target is 1 percent.

a Is the federal funds rate currently too high or

Too low? By how much? Show your work.

b Suppose that a year has gone by, output is now

Just 1 percent above potential, and the inflation

Rate was 1.5 percent over the year. What fed-

eral funds rate should the Fed now set (assume-

ing that the inflation target does not change)?

3 Solution for Federal Funds Rate
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Federal funds rate target= equilibrium real federal
$5.00 no category usmanuak1 1 time(s)
Complete solution Fedral funds rate
$10.00 no category experttarun 0 time(s)
100% correct solution, you can trust me.
$10.00 no category azharali481 2 time(s)
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