Answered: The new chairman of the Ionian Central…

Principles of Economics, 7th Edition (MindTap Course List)

7th Edition

ISBN:9781285165875

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter35: The Short-Run Trade-off Between Inflation And Unemployment

Section: Chapter Questions

Problem 5PA

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Question

The new chairman of the Ionian Central Bank (ICB) is preparing for her first board meeting. She is expected to recommend a monetary policy for the board to pursue. She decides to use the Taylor rule, which was originally developed for the U.S. Federal Reserve.

Ionia's potential GDP is 100 million drachma, but current GDP is 94 million94 million . What is Ionia's output gap?

Ionia's output gap:

Inflation is running at 5%5% , but the chairman considers an inflation rate of 3% to be a reasonable goal. What is Ionia's inflation gap?

Ionia's inflation gap:

The Taylor rule helps the chairman to determine the target

discount rate.

inflation rate.

fed funds rate.

Calculate this target rate for Ionia, according to the Taylor rule.

target rate:

The current rate is 4%, so the chairman recommends

buying securities.

selling securities.

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