Suppose that the equilibrium real overnight interest rate is 1 percent and the target rate of inflation is 1 percent. Use the following information and the Taylor rule to calculate the overnight interest rate target:_____% Current inflation rate:- 7% Potential real GDP:-$ 1.47trillion Real GDP:- $ 1.49 trillion

Suppose that the equilibrium real overnight interest rate is 1 percent and the target rate of inflation is 1 percent. Use the following information and the Taylor rule to calculate the overnight interest rate target:_____% Current inflation rate:- 7% Potential real GDP:-$ 1.47trillion Real GDP:- $ 1.49 trillion

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter14: Money And The Economy

Section: Chapter Questions

Problem 10QP

See similar textbooks

Similar questions

Suppose the Federal Reserve's policy is to maintain low and stable inflation by keeping unemployment at its natural rate. However, the Fed believes that the natural rate of unemployment is 4 percent when the actual natural rate is 5 percent. 1. If the Fed bases its policy decisions on its belief, the inflation rate will spiral upward? downward?.
Suppose the interest rate that banks in Techland charge one another for overnight loans is 5 percent, the long-term nominal interest rate is 4.5 percent, and the long-term expected inflation rate is 3 percent. What is the long-term expected real interest rate? How will the long-term expected real interest rate be affected if the central bank of Techland starts purchasing government bonds from banks?
Economists sometimes argue that moderate inflation may help the economy by making wages in labor markets more ["", "", ""] . The discussion in the text pointed out that wages tend to be sticky in their downward movements and that unemployment can result. A little inflation could nibble away at ["", ""] wages, and thus help real wages to ["", ""] if necessary. In this way, even if a moderate or high rate of inflation may act as sand in the gears of the economy, perhaps a low rate of inflation serves as oil for the gears of the labor market. This argument is controversial. A full analysis would have to account for all the effects of inflation. It does, however, offer another reason to believe that, all things considered, very low rates of inflation may not be especially harmful.
If inflation rises from 10 to 14 percent, explain what happens to real andnominal interest rates according to the Fisher effect? Could you provide an answer for both real and nominal aspect?
what is the mean by the "time inconsistency"of economic policy? why might policymakers be tempted to renege on an annoucement they made earlier ? in this situation, what is the advantage of a policy rule? explain how it might arise in the case of the short run trade off between inflation and unemployement?
According to the Fisher effect, an increase in expected inflation will A) decrease the demand for money to keep the real interest rate constant B) increase real output by the same percentagnterest rate C) increase the nominal by the expected inflation rate increase the real interest rate by the expected inflation rate E) adjust the natural rate of unemployment to the inflation rate to keep cyclical unemployment at ze D)
The economy of Macro Island is described by the quantity equation with constant velocity. All residents of Macro Island understand the quantity theory and use it to form their expectations of inflation. Real income grows at a steady 2 percent per year, and the nominal interest rate is 5 percent. In one year, people had expected the money supply to grow by 4 percent, but in fact it grew by only 3 percent. a. What was the inflation rate? (3% 4% 1% 2%) b. What was the expected inflation rate? (1% 4% 3% 2%) c. What was the ex ante real interest rate? (4% 2% 1% 3%) d. What was the ex post real interest rate? (2% 1% 4% 3%) e. Did the deviation of inflation from what was expected hurt creditors or debtors? ( Creditors Debtors)
Assume an economy’s annual money velocity in circulation is 10. Please answer the following two question: In the view of monetarists (i.e. neoclassical view), if the annual economic growth rate is 6%, what should be the money supply increasing rate to maintain a low inflation rate as 3%? Please show equation.
In the basic New Keynesian model, suppose that there is an increase in the future marginal product of capital. Explain your results with the aid of diagrams. Suppose that the central bank keeps the nominal interest rate at its initial value. What will be the effect on current inflation and on output? Suppose that the economy initially faces an increase in anticipated future inflation and a zero output gap. When the shock occurs, what should the central bank do?
Suppose the current inflation rate is a constant 7% and the central bank implements a disinflation policy to reduce it to its target rate of 3%. To achieve this objective the central bank, by increasing its cash rate, raise the nominal interest rate from its current 9% to 14%. In the long run, at which the central bank achieves its inflation target, what will be the nominal rate of interest, the real rate of interest and the inflation rate?
Assume the Federal Reserve has forecasted inflation over the next year to be over its target. Because it conducts policy based on uncertain forecasts and on lags in its effects on the economy, a prudent policy for it to follow is Question 40 options: making small changes in interest rates over time to do nothing to increase the growth rate of the monetary base make large changes in interest rates and then wait to see what inflation does
Fully explain why unanticipated inflation can decrease the level of economic activity