Answered: If the Fed is following the "benchmark…

If the Fed is following the "benchmark Taylor Rule", and the equilibrium real interest rate is 4%, what will the equilibrium inflation rate be? (Note that in equilibrium, the output gap is 0)

Economics (MindTap Course List)

13th Edition

ISBN:9781337617383

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter14: Money And The Economy

Section14.4: Money And Interest Rates

Problem 3ST

See similar textbooks

Related questions

Q: Distinguish between the Keynesian theory and the neoclassical theory of money demand

A: There are different types of theories of demand for money in economics as per the time period. The…

Q: In the third quarter of 2020, U.S. GDP was $18,583 while full-employment GDP is an estimated…

A: The central bank controls the short-term interest rate as an operational target through the use of…

Q: If the actual inflation rate is greater than the target inflation rate, then relative to the neutral…

A: Taylor Rule proposes how interest rates should be changed by the Federal Reserve to counter…

Q: Using Taylor's rule, when the equilibrium real federal funds rate is 2 percent, the positive output…

A: please find the answer below.

Q: Describe the Fed’s monetary policy actions over the course of the 2020 year and identify whether…

A: Considering the impacts of COVID-19 on financial action and on dangers to the viewpoint, the FOMC…

Q: Some commentators have argued that the Fed is running a risk with inflation in the future as a…

A: Some commentators have argued that the Fed is running a risk with inflation in the future as a…

Q: Suppose the actual federal funds rate is equal to the rate implied by a particular inflation goal.…

A: The central bank of the economy works towards maintaining price stability and maximum sustainable…

Q: What is the key assumption underlying the Fed’s abilityto control the real interest rate?

A: The interest rate is the rate charged by the lender on the asset lent by them or received by…

Q: Suppose the current inflation rate is 5.8%, real gdp is $22.5 trillion and potential real gdp is $22…

A: The economies tend to have a limit to the amount of resources with them, while the wants and demand…

Q: Assume the economy is currently in Recession and the Federal Reserve has chosen to use the required…

A: When the economy is in recession it requires expansionary monetary or fiscal polices or both.

Q: Suppose the inflation rate target is zero and the long-run federal funds target is also zero. If the…

A: (Q) Suppose the inflation rate target is zero and the long-run federal funds target is also zero. If…

Q: Which of the following statements is most accurate about the Fed's zero interest rate policy (ZIRP)?…

Q: Which of the following best describes the uncertian consequences of the policy that the FED plans to…

A: Answer: There occurs a trade-off between inflation and unemployment in the short-run. If the fed…

Q: For the purpose of this exercise, assume that velocity is stable. If the Fed wants to keep inflation…

A: In economics, inflation refers to an increase in the overall price levels in an economy from one…

Q: What happens to the money supply when the Fed buys government bonds? According to the theory of…

A: MONEY SUPPLY Money supply refers to the volume of currency regulated in the economy during a period…

Q: Which of the following is true? When income tax rates fall, it is possible for tax revenues to rise.…

A: These Options are Wrong Because 1) Tax rate cuts influence incomes in two ways. Each tax rate slice…

Q: According to liquidity preference theory, if the price level increases, then the equilibrium…

A: The principle of liquidity preference is a representation that illustrates that a buyer can claim a…

Q: the amount of inflation caused by expansionary monetary policy depends on the slope of the supply…

A: Inflation: - Inflation is the phenomenon of an increase in the prices of goods and services in an…

Q: In order to combat inflation, the Fed will ________ the federal funds rate thereby ________ the…

A: In order to combat inflation, the fed will increase the rate of federal funds. Which results in less…

Q: If the Federal Reserve tries to target inflation near 2%, the inflation rate is 3%, and output is 3%…

A: The formula of Taylor rule is as follows:

Q: If the unemployment rate is falling from 4 to 3%, while the inflation rate is increasi from 2% to…

A: Both the higher unemployment rate and the lower unemployment rate are the macroeconomic problems.…

Q: Monetary policy actions by the Fed are

Q: Are you concerned about the inflation come back due to such easy monetary policy with zero interest…

A: The pace at which prices keep rising over a certain amount of time is referred to as…

Q: The two typical liabilities on the Fed balance sheet comprise which of the following

A: The Federal Reserve System is the national bank of the United States and is answerable for the…

Q: With a current inflation rate of 1.8%, Real GDP = $23,450, and Potential Real GDP = $22,900, what is…

A: To find the federal fund rate, use the below formula. Federal Fund Target Rate = Inflation rate +…

Q: If the money demand function is unstable and undergoes substantial, unpredictable changes, then the…

A: Money supply does not give that much information regarding money demand function.Interest rates…

Q: Managing expectations of the Fed Funds rate in order to achieve lower long- term interest rates is…

A: Monetary Policy refers to the macroeconomic policies through which a country's central bank controls…

Q: Suppose that the next FOMC meeting is coming up in a few days and the official inflation and output…

A: It is given that the economy is approaching towards a new session of the Federal Open Market…

Q: At their last meeting, the Fed indicated that it would begin reducing its purchases of longer-term…

A: Treasuries are government securities. These securities are for short term as well as for long term.…

Q: The amount of inflation caused by expansionary monetary policy depends on the slope of the aggregate…

A: Aggregate supply curve is nothing but a graph that shows the relationship between real GDP and price…

Q: Identify the sources ofinflation and the roleof monetary policy inpropagating inflation.

A: Inflation is the increment in the overall price-level of the economy. There are different reasons…

Q: What is the likely outcome if the Fed seeks to maintain a federal funds rate of 0% even when the…

A: The Fed or the central bank of the nation use various monetary tools for the proper functioning of…

Q: When the Federal Reserve buys bonds, it effectively lowers the nominal interest rate in the market.…

A: Nominal interest rate are the rate which are before adjustment of inflation. This rate of interest…

Q: Actions by the Fed to fight rising rates of inflation likely will initially: (a) reduce long-term…

A: In an economy, it can be seen that a monetary policy is generally beneficial in the short-run due to…

Q: Consider the following simple monetary rules estimated for two different periods, 1969-1985 and…

A: Taylor Rule is defined as a formula which used to predict how the Central Bank would make changes in…

Q: The only one interest rate in the economy the Fed can control directly is the FFR. True False

A: Federal Fund Rates (FFR): It is the interests that the commercial banks charges to lend and borrow…

Question

If the Fed is following the "benchmark
Taylor Rule", and the equilibrium real
interest rate is 4%, what will the equilibrium
inflation rate be? (Note that in equilibrium,
the output gap is 0)
A. 0% B. 2% C. 4% D. 6% E. 8% or higher

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.

Similar questions

Y = C + I + G + NX C = 300 + 0.75 DI where DI = Y - T I = 600 - 1000r, G = 300, NX = -100, T = 200 How much is equilibrium Y if Fed decides to set the rate of interest at 10% (r = 0.1)
Suppose the current inflation rate is 5.8%, real gdp is $22.5 trillion and potential real gdp is $22 trillion. What is happening in the economy and what sort of Fed response would be expected?
If the Fed decides to leave the federal funds rate target range unchanged, we would expect _______. A. deflation to occur and the unemployment rate to increase B. the recessionary gap to increase C. potential GDP to increase and the full-employment quantity of labor to increase D. inflation to increase and the unemployment rate to decrease
TRUE FALSE The more the Fed accommodates shocks to money demand, the larger the (government) spending multiplier.
What happens when the Fed begins to taper purchases? (a) The supply of bonds increases, price rises and interest rates rise (b)Demand for bonds decreases, prices fall, and interest rates rise (c) The supply of bonds decreased, prices fall, and interest rates rise
With a policy of nominal GDP targeting, if the Fed expected 6% growth in real GDP and wanted an inflation rate of 2%, it would set a target for nominal GDP growth of 8% per year. True False
As per the additional reading “What should be the Fed’s response to Stagflation”, all the following statements are true EXCEPT Group of answer choices The risks of stagflation are real. The Fed should try and taper its balance sheet first and then raise the interest rate. The Federal Reserve (Fed) should raise the interest rates immediately. The Fed needs to have a more meaningful monetary tightening.
Using the Taylor Rule, find the appropriate Federal Funds rate (FFR). Assume that the Fed has target inflation rate of 2% and a target GDP growth rate of 3%. What FFR should the Fed target if the current inflation is 5% and the growth rate is 4%?
The purpose of the commitment by the Fed to keep the federal funds rate at zero for a long period of time is to A) lower the long term interest rates. B) lower the short term interest rates. C) increase the long term interest rates. D) increase the short term interest rates. [ dont use chatgpt i will 10 upvotes]
If real GDP is $18.9 Trillion, potiental real GDP is $18.8 Trillion, and the current inflation rate is 4.2%, what is currently happening in the economy and what FED response is expected?
We would expect that the level of income that would equate total demand for and total supply of money would be: (a) roughly at the level of the Fed’s interest rate target; (b) lower the lower the interest rates; (c) equal to the level that would equate realized investment with realized savings; (d) higher the lower the interest rate (or lower the higher the interest rate)
10. Suppose that the equilibrium real federal funds rate is 2.5% and the target inflation rateis 2.5%. If the current inflation is 6.25% and the output gap is -2.3%, use the Taylorrule to find the federal funds rate that the Fed should choose. Show your work.