Federal Inflation Rate, Business Economics

Numerical Exercise 11.
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 x (i – 5)
Suppose that a model of the economy suggests that the real interest rate is determined by the equation
R= 8.5 - % ?Y
Where Y is the level of output, so % ?Y 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 - % ?Y, 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?
Posted Date: 12/9/2012 7:27:07 PM | Location : United States







Related Discussions:- Federal Inflation Rate, Assignment Help, Ask Question on Federal Inflation Rate, Get Answer, Expert's Help, Federal Inflation Rate Discussions

Write discussion on Federal Inflation Rate
Your posts are moderated
Related Questions
Calculate the market value of your corporation at the end of the sample period.  Multiply the last price in the sample times the number of shares outstanding at that time.  You can

how does the effect of inflation affect the spending ability of fixed income earners

What is factor endowment problem? Factor endowment Problem: Several LDCs have a poor factor endowment than productivity and incomes both are very low according to world

Question 1: By using appropriate models critically analyse the following statement: "Money demand for speculative as well as transactional motive is inver

what is price expectation elasticity of demand?

1. Consider the market where there is product differentiation with two firms. The firms are choosing prices p1 and p2 and have demands given by q1 = 40 - 0.5 p1 + p2 q2 = 60

What are the critics of advocates of World Bank in promotion of development? Critics of the World Bank argue: • A one-size-fits all strategy which does not take account

opportunity cost and decision making

The amount of a good or service that a consumer is willing and able to buy at each particular price

Illustrate the implications of agricultural price instability problem for Less Developed Countries? Implications of agricultural price instability problem for LDCs: a. Agric