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
Question 1: The triple concepts-  globalisation, good governance and democracy-  have largely dominated international discourse since a long time.  (a) Briefly explain the ter

What are the factors of evaluating a policy or institution? Factors to consider during evaluating a policy or institution comprise: • Internal and external constraints onto

how many statics numericals in quantitative economics

What is the role of World Bank in the promotion of development? The World Bank was found to promote post-war reconstruction and flow of capital to progressing countries. Its o

What are the internal constraints on government action less developed countries? Internal Constraints on Government Action LDCs: • Have restricted domestic resources to ac

#discuss the theory of costs in relation to business operations.you should identify different types of costs and explain how the supply curve is constructed for an organisation?

Change in Currency Rate Change in the sterling currency rate has also great consequences because it depends upon the sterling currency rate to the other countries as well. As

Distribution of benefits for transferring drivers to transit during a congested morning commute A residential suburb has N = 30,000 commuters who drive alone to jobs in a cen

case study on diamond price and petrol price for exxception to the law of demand

what is the important or usefulness of pricing practices to management