Federal Inflation Rate, Business Economics

Assignment Help:
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?

Related Discussions:- Federal Inflation Rate

Macroeconomics, you are appointed secretary of the treasury of recently ind...

you are appointed secretary of the treasury of recently indepent country called rugaria

#title.BUS100., Find 1-3 articles that discuss the competition between Targ...

Find 1-3 articles that discuss the competition between Target and Walmart.

Explain the concept price discrimination, QUESTION 1 (a) Explain the co...

QUESTION 1 (a) Explain the concept price discrimination? (b) Discuss the views that price discrimination always operates in the public interest. QUESTION 2 (a) Descr

Fiscal policy, Fiscal Policy The government's use of spending and taxat...

Fiscal Policy The government's use of spending and taxation to affect the stage of macroeconomic moment. In theory, weak economic activity needs simulative fiscal policy, which

Global finance crisis, Australia has emerged from the Global Finance Crisis...

Australia has emerged from the Global Finance Crisis (GFC) as "the strongest economy in the developed world" (Editorial, The Australian, 11 December 2009). The economic editor of T

Labour force, how does occupation affect the size of labour force

how does occupation affect the size of labour force

Aati, need assistance

need assistance

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd