Consider the following graph. The IS curve representing the goods market is drawn as the usual downward rate (EFFR) was 5.08%. Long-term trend output is given by the vertical line at Y* sloping curve. The ONRRP for May 2023 was 5.05% and the IORB was 5.15%. The effective federal funds 5.40 5.30 5.15 5.05 Y* Y=C(Y-T,W)+I(Y,r)+G Y 1. At the May 2023 band between the IORB and the ONRRP is the Fed able was the EFFR high enough to lower aggregate demand to target Y*? Explain. 2. In July 29, 2023 the Fed raised both the IORB and ONRRP by 0.25 percentage points (to 5.3 and 5.4%). The EFFR is currently 5.38%. According to the graph, is this range high enough for the Fed be able to use the EFFR to target Y*? Explain. 3. If the current level of the EFFR in the band between IORB and ONRRP causes housing prices to fall, could output fall below trend output? Explain. Illustrate in the graph above. 5
Consider the following graph. The IS curve representing the goods market is drawn as the usual downward rate (EFFR) was 5.08%. Long-term trend output is given by the vertical line at Y* sloping curve. The ONRRP for May 2023 was 5.05% and the IORB was 5.15%. The effective federal funds 5.40 5.30 5.15 5.05 Y* Y=C(Y-T,W)+I(Y,r)+G Y 1. At the May 2023 band between the IORB and the ONRRP is the Fed able was the EFFR high enough to lower aggregate demand to target Y*? Explain. 2. In July 29, 2023 the Fed raised both the IORB and ONRRP by 0.25 percentage points (to 5.3 and 5.4%). The EFFR is currently 5.38%. According to the graph, is this range high enough for the Fed be able to use the EFFR to target Y*? Explain. 3. If the current level of the EFFR in the band between IORB and ONRRP causes housing prices to fall, could output fall below trend output? Explain. Illustrate in the graph above. 5
Chapter18: The Keynesian Model
Section: Chapter Questions
Problem 14SQ
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Transcribed Image Text:Consider the following graph. The IS curve representing the goods market is drawn as the usual downward
rate (EFFR) was 5.08%. Long-term trend output is given by the vertical line at Y*
sloping curve. The ONRRP for May 2023 was 5.05% and the IORB was 5.15%. The effective federal funds
5.40
5.30
5.15
5.05
Y*
Y=C(Y-T,W)+I(Y,r)+G
Y
1. At the May 2023 band between the IORB and the ONRRP is the Fed able was the EFFR high enough to
lower aggregate demand to target Y*? Explain.
2. In July 29, 2023 the Fed raised both the IORB and ONRRP by 0.25 percentage points (to 5.3 and 5.4%).
The EFFR is currently 5.38%. According to the graph, is this range high enough for the Fed be able to use the
EFFR to target Y*? Explain.
3. If the current level of the EFFR in the band between IORB and ONRRP causes housing prices to fall, could
output fall below trend output? Explain. Illustrate in the graph above.
5
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