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
The economy of Cotai contains 2000 $1 bills. (a) If people hold all money as currency, what is the quantity of money? (b) If people hold all money as demand deposits and bank

Is the Washington Consensus actually a consensus? The Washington agreement thinking dominates development thinking in the developed world but is challenged through less develo

What are Rostowís assumptions? Assumptions of Rostowís: • Economic development procedure is universal which is all countries whether within Africa or Asia go by the same se



as mention above, the physical demand for gold rises in india during late summer and the beginning of fall.what situation occurs at the end of the year?

BALANCE OF PAYMENTS: The record of all transactions (trade and financial) of the residents of one country with the rest of the world is Balance of Payments (BoP). The directio

IMPLEMENTATION ISSUES: Infrastructure sector, especially economic infrastructure, projects are facing a variety of problems, which are to be addressed in order to realise the

Aska) Explain why each of the following factors may influence the own price elasticity of demand for a commodity. (i) Consumer preferences, that is, whether consumers regard the c

How much power or influence does a U.S. President versus a company CEO actually have in a free enterprise system, when it comes to producing jobs or the decision to manufacture co