Explain is the federal funds rate currently too high

Reference no: EM13205738

Suppose that the economy is thought to be 2% above potential (that is, the output gap is 2%) when potential output grows 4% per year. Suppose also that the Fed is following the Taylor rule, with an inflation rate of 2% over the past year. The federal funds rate is currently 3%. The equilibrium real federal funds rate is 3%, and the weights on the output gap and inflation gap are 0.5 each. The inflation target is 1%.

A- Is the federal funds rate currently too high or too low? By how much? Show your work

B- Suppose that a year has gone by, output is now just 1% above potential, and the inflation rate was 1.5% over the year. What federal funds rate should the Fed now set (assuming that the inflation target does not change)?

Reference no: EM13205738

Questions Cloud

Why does the productivity standard typically fail : explain why the productivity standard for the distribution of income entails rewarding people based on their contribution to societys total output. why does the productivity standard typically fail to yield an equal distribution of income

State what range of ph is suitable for this kind of buffer : What range of pH is suitable for this kind of buffer? Calculate the ratio of phosphoric acid to phosphate to gice you pH .= 6.8

Which policy do you think is better in the short run : Suppose that the Fed's inflation target is 2%, potential output growth is 3.5%, and velocity is a function of how much the interest rate differs from 5%: %^V= 0.5 X (i-5). Suppose that a model of the economy suggests that the real interest rate is..

Explain calculations to prove that dilution of aniline : which portion of the titration curve are you in to reach pH = 7? Show your calculations to prove that dilution of 10,000 gal aniline requires 0.58 gal of this acid.

Explain is the federal funds rate currently too high : Suppose that the economy is thought to be 2% above potential (that is, the output gap is 2%) when potential output grows 4% per year. Suppose also that the Fed is following the Taylor rule, with an inflation rate of 2% over the past year.

State octahedral geometry all at distances : Solid CrF3 contains a Cr(III) ion surrounded by six F- ions in an octahedral geometry all at distances of 190 pm. However, MnF3 is in a distorted geometry with Mn-F distances of 179,191, and 209 pm (two of each).

What happens to princeton banks balance sheet : Suppose that the Fed raises the reserve requirement on transactions deposits to 0.18 = 18%. What happens to Princeton Bank's balance sheet Does it have excess reserves, or is it short of reserves? Calculate the new M1 and M2 multipliers. What happ..

What is the new cost of goods sold percent of sales : What is the new cost of goods sold percent of sales for each of the countries and what are your recommendations on choice of country?

Compute the concentration of edta : titrating a solution containing 25 mL of 0.0100 M MgCl2 solution, 1 mL of NH3OH buffer, and 10 drops of Calmagite with EDTA. Calculate the concentration of EDTA. Report the answer with three sig figs.

User Account

All Pages