The Taylor Rule is given by r = it + pt + 0.5(it - i*t) + 0.5(u*t - ut) The Federal Reserve is targeting 2% inflation and the natural rate of unemployment is believed to be 4.7%. Economic data suggests that the inflation rate is currently 4.7% while the unemployment rate is 9.8%. The real rate of interest is believed to be 2.5%. According to the Taylor Rule, what target should the Federal Reserve set for the Federal Funds Rate?
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- According to the Taylor Rule, if inflation rises by 2%, then the targeted interest rate should rise by more than 2%. Select one: True FalseSuppose Bangladesh Bank (BB) decided to follow the Taylor rule to conduct monetary policy. BB's target interest rate is the lending rate. The economists in BB understands that there will be some time lag for their policy to be effective and therefore they use a forecasted or expected inflation rate (instead of current inflation rate) in their policy rule. BB is equally concerned about output and inflation. According to BB's estimate the equilibrium real lending rate is 5 percent. BB's inflation target is 3 percent and the deviation of actual output from the potential output (as measured by the HP filter) is 1 percent.a. If the expected inflation rate is 6%, then at what target should the lending rate be set according to the Taylor rule?.Consider both/either model of inflation and economic growth. In the long run, lower rates of moneysupply growth result in:a.higher GDP growth. b.lower GDP growth. c.higher inflation. d.lower velocity growth. e.lower inflation.
- 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 trillionRefer to the Reserve Bank news release below. Use the AD/AS model to answer how each of the economic factors stated are affecting inflation and economic growth. Official Cash Rate unchanged at 1.5 percent Date 26 June 2019 The Official Cash Rate (OCR) remains at 1.5 percent. Given the weaker global economic outlook and the risk of ongoing subdued domestic growth, a lower OCR may be needed over time to continue to meet our objectives. Domestic growth has slowed over the past year. While construction activity strengthened in the March 2019 quarter, growth in the services sector continued to slow. Softer house prices and subdued business sentiment continue to dampen domestic spending. The global economic outlook has weakened, and downside risks related to trade activity have intensified. A number of central banks are easing their monetary policy settings to support demand. The weaker global economy is affecting New Zealand through a range of trade, financial, and confidence channels. We…Refer to the Reserve Bank news release below. Use the AD/AS model to answer how each of the economic factors stated are affecting inflation and economic growth. Official Cash Rate unchanged at 1.5 percent Date 26 June 2019 The Official Cash Rate (OCR) remains at 1.5 percent. Given the weaker global economic outlook and the risk of ongoing subdued domestic growth, a lower OCR may be needed over time to continue to meet our objectives. Domestic growth has slowed over the past year. While construction activity strengthened in the March 2019 quarter, growth in the services sector continued to slow. Softer house prices and subdued business sentiment continue to dampen domestic spending. The global economic outlook has weakened, and downside risks related to trade activity have intensified. A number of central banks are easing their monetary policy settings to support demand. The weaker global economy is affecting New Zealand through a range of trade, financial, and confidence channels. We…
- Which of the following is true of Advantages of the US implicit Nominal Anchor? Select one: a. The Fed’s forward-looking behavior and stress on price stability also help to discourage overly expansionary monetary policy, thereby ameliorating the time consistency problem. b. It does not enable monetary policy to focus on domestic considerations. c. It relies on a stable money-inflation relationship. d. None of the aboveContinuing to work with a 2% inflation target, a 1999 version of the Taylor Rule and an initial nominal policy rate of 1.5%, now consider the impact of including a variable risk premium that is typically positive, meaning that the market interest rate is usually above the central bank policy rate. In the following questions, assume the normal (natural) risk premium is 100bp, the economy has a negative output gap (minus 1%), the actual risk premium is 300bp, the economy’s natural real market interest rate is 2% and that both actual and expected inflation is 1%. 5a) what nominal policy rate would you recommend? 5b) what is the natural nominal policy interest rate? 5c) how does the new market real interest rate compare with its initial level? 5d) what nominal policy rate would the Taylor Rule recommend if the negative output gap then widened to minus 2% and both current and expected inflation fell to zero? (other factors, including the risk premium remaining unchanged)If you were to learn that a bottle of Gatorade increased in size from 2009 to 2010 by 100 percent, should that information affect your calculation of the inflation rate? If so, how? 2009 Gatorade $1 each qty 1 2010 Gatorade %2 each qty 1
- In the basic New Keynesian model, if anticipated future inflation decreases and the central bank does not change its interest rate target in response, then A. output rises and inflation rises. B. output stays the same and inflation falls. C. output falls and inflation falls. D. output and inflation stay the same. E. output rises and inflation falls.Suppose a country has a money demand function (M/P)d=kY, where k is a constant parameter. The money supply grows by 12 percent per year, and real income grows by 4 percent per year. What is the average inflation rate?According to the classical theory of money, inflation does not make workers poorer because wages increase: Select one: a. faster than the overall price level. b. more slowly than the overall price level. c. in proportion to the increase in the overall price level. d. in real terms during periods of inflation.