Fed's Inflation - 24706

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Suppose that the Fed’s inflation target is 2 percent,

Potential output growth is 3.5 percent, and velocity-

 is a function of how much the interest rate

Differs from 5 percent:

%?V ? 0.5 ? (i ? 5)

  Suppose that a model of the economy suggests

That the real interest rate is determined by the


R ? 8.5 ? %?Y

Where Y is the level of output, so %ΔY is the

Growth rate of output. Suppose that people

Expect the Fed to hit its inflation target.

A Calculate the optimal money growth rate

Needed for the Fed to hit its inflation target in

The long run.

B In the short run, if output growth is just

2 percent for two years and the equation

Determining the real interest rate changes to

r ? 4.5 ? %ΔY, what money growth rate

should the Fed aim for to hit its inflation

target in that period?

c If the Fed instead maintained the money

growth rate from part a, what is likely to

happen to inflation?

d Which policy do you think is better in the short run? Which is better in the long run?

3 Solution for Fed's Inflation
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$8.00 no category experttarun 1 time(s)
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