The natural real rate of interest

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Assume that output is 1.6% below potential and that the inflation rate is 3.5%. Assume that the Fed has specified the inflation coefficient is á = 0.5 and that the natural real rate of interest is 2%. At what level should the Fed set the federal funds rate if it wants to enforce a strict inflation target of 2.5%?

Reference no: EM13739784

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