Suppose that the Fed's inflation target is 2 percent, potential outlook growth is 3.5 percent, and velocity is a function of how much interest rate differs from 5 percent:
% triangle V = 0.5 x ( i-5)
Suppose the model of the economy suggests that the real interest rate is determined by the equation where Y is the level of output, so %triangleY is the growth rate of output. Suppose that the people expect the Fed to it its inflation target.
r= 8.5- % triangle Y
A: Calculate the optimal money growth rate needed for the Fed to hit its inflation target in the long run.
Given target inflation rate is 2%, so e = 2%