A) includes the prices of more consumer goods and services. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals 17) The core personal consumption expenditures price index excludes, 18) The consumer price index (CPI), the personal consumption expenditures price index (PCE), and the core PCE have over the last 10 years. Discount rate. Assume that the equilibrium real federal funds rate is 2% and the target for inflation is 1%. The Fed Funds rate was lowered from 5.25% in August, 2007 to effectively zero by December 2008 and it has remained at that level ever since. Kindly login to access the content at no cost. A) the central bank adopts a rigid target for inflation and ignores declines in output. 16) An advantage of the personal consumption expenditures price index (PCE) over the Consumer Price Index (CPI) as a measure of inflation is that the PCE. First proposed by Economist John B. Taylor in 1993, the Taylor Rule algorithmically For example, if the nominal interest rate offered on a three-year deposit is 4% and the inflation rate over this period is 3%, the investor’s real rate of return is 1%. Now suppose that the Fed retargets the rate to 3.5 percent. Multiple Choice Difficulty: 2 Medium Learning Objective: 15-01 How interest rates are set in the money market. 15) An advantage of the personal consumption expenditures price index (PCE) over the Consumer Price Index (CPI) as a measure of inflation is that the PCE. Use the following information and the Taylor rule to calculate the federal funds rate target: Current inflation rate = 4 percent Potential real GDP = $14.98 trillion Real GDP = $14.11 trillion Averaging real interest rates to estimate the equilibrium rate assumes that, on average, the real rate equals the equilibrium rate; that is, on average inflation and inflation expectations are at goal and output is at potential. Equilibrium interest rate. Current inflation rate = 4 percent Potential real GDP = $14.72 trillion Real GDP = $14.81 trillion The federal funds target rate is ___% B) moved roughly together with the PCE being the most stable. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate.. Also, assume that the current Federal funds rate is at the 3 percent rate that is targeted by the Fed. D) not moved together, with the CPI being the most stable. But computing the average for a sample period for which this isn’t the case will yield biased estimates. The federal funds rate is currently 4 percent. 2 In addition to exhibiting large swings, the Laubach-Williams point estimate of the equilibrium rate is a very uncertain statistic. 11) Suppose the equilibrium real federal funds rate is 5 percent, the target rate of inflation is 3 percent, the current inflation rate is 5 percent, and real GDP is 4 percent above potential real GDP. Suppose the the equilibrium real federal funds rate is 4 percent and the target rate of inflation of 1 percent. B) Inflation targeting assumes that the Fed can accurately forecast future inflation rates. We use cookies to ensure that we give you the best experience on our website. You don't know the Fed's inflation target, but the equilibrium real interest rate is 4 percent, the inflation rate is 3 percent, the weight on the GDP gap is 0.4, the weight on the inflation gap is 0.6 and nominal GDP is 2 percent points below its target. C) includes the prices of industrial equipment. A) is a more narrow, focused measure of inflation. a. Laubach and Williams opted for the single-equation approach and estimated that the equilibrium real funds rate was around 3 percent in mid-2002 but that it varied from as low as 1 percent in the early 1990s to as high as 5 percent in the late 1960s. Economists commonly assume a tight link between the equilibrium real federal funds rate (the Fed’s benchmark short-term rate) and the pace of economic growth. 19) The Federal Reserve could target both the money supply and the interest rate at the same time if it controlled money demand along with money supply. Prime lending rate. 20) Inflation targeting has been adopted by the central banks of several countries including the European Central Bank. At $400 billion valuation, which is the biggest company ever to be added to the S&P500 Index. Math, Math Problems and Solutions, Tests, Formulas, Algebra. Suppose that inflfl ation is 2 percent, the Federal funds rate is 4 percent, and real GDP falls 2 percent below potential GDP. The median projection of the long-run fed funds rate—essentially, an estimate of the neutral rate—has declined over time. This E-mail is already registered as a Premium Member with us. Use the following information and the Taylor rule to calculate the federal funds rate target: Current inflation rate = 1 percent Potential real GDP = $14.87 trillion 14) To measure inflation, the Federal Reserve relies most upon the. Calculate the Fed's … Suppose that the equilibrium real federal funds rate is 4 percent and the target rate of inflation 3 percent. D) is a fixed market-basket price index that does not allow the mix of products to change each year. 13) Which of the following is not an argument against inflation targeting? First, the uncertainty around the equilibrium rate is large, and its relationship with trend GDP growth much more tenuous than widely believed. Question: Suppose the equilibrium real federal funds rate is 2 percent, the current inflation rate is 4 percent, the target rate of inflation is 2 percent, and real GDP is 2 percent above potential real GDP. If you continue to use this site we will assume that you are happy with it. I tried solving this problem and the answer at the end of the book differs from my own: Suppose that inflation is 2 percent, the Federal funds rate is 4 percent, and real GDP is 4.00 percent above potential GDP. This reduction is half a 1/2 a percentage point for each percentage point actual real GDP is below potential GDP. This E-mail is already registered with us. D) includes the prices of goods, but not services. C) Inflation targeting makes monetary policy ineffective because the targets are publicly announced. Since real GDP is 2 percentage points below potential GDP the Fed should lower the Federal funds rate by 1 percentage point. Suppose the equilibrium real federal funds rate is 1 percent, the target inflation rate is 2 percent, the current inflation rate is 0.8 percent, and real GDP is 0.8 percent above the potential real GDP level. Question 3. C) includes the prices of consumer services, but not consumer goods. We draw three main conclusions. Kindly login to access the content at no cost. We examine the behavior, determinants, and implications of the equilibrium level of the real federal funds rate, interpreted as the long run or steady state value of the real funds rate. D) Inflation targeting holds the Fed accountable for an inflation goal, but may make it less likely the Fed will achieve other goals. Our Experts can answer your tough homework and study questions. So if the inflation target was 2 percent, actual inflation was 3 percent, output was at its potential, and the real federal funds rate was 2 percent, the Taylor Rule suggests that the fed funds target should be fft = π + ff*r + ½ (π gap) + ½ (Y gap) fft = 3 + 2 + ½ (1) + ½ (0) fft = 5.5 The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation. → Federal funds rate. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals 33-14 C) the central bank commits to achieving a target level of inflation which is never announced publicly. 11) Suppose the equilibrium real federal funds rate is 5 percent, the target rate of inflation is 3 percent, the current inflation rate is 5 percent, and real GDP is 4 percent above potential real GDP. The Fed has declared an intention to keep short-term interest rates at this near-zero level through late 2014. In this equation, both and should be positive (as a rough rule of thumb, Taylor's 1993 paper proposed setting = =). So if the inflation target was 2 percent, actual inflation was 3 percent, output was at its potential, and the real federal funds rate was 2 percent, the Taylor Rule suggests that the fed funds target should be fft = π + ff*r + ½ (π gap) + ½ (Y gap) fft = 3 + 2 + ½ (1) + ½ (0) fft = 5.5 C) moved roughly together with the core PCE being the most stable. Your email address will not be published. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals A)-3 percent. The federal funds rate is affected greatly through the Fed's open market operations. B) is a chain-type price index that allows the mix of products to change each year. D) the central bank commits to a monetary growth rule. B) GDP Deflator, the broadest available price index. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent. (adsbygoogle = window.adsbygoogle || []).push({}); Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP equals potential GDP, then the federal funds target rate equals the. Using the Quantity Theory of Money, what should be the annual growth rate of real money balance, M/P ? B) includes the prices of consumer goods, but not consumer services. Suppose that the demand for Federal funds curve is such that the quantity of funds demanded changes by $120 million for each 1 percent change in the Federal funds interest rate. The rule is based on three main indicators: the federal funds rate, ... is the assumed equilibrium real interest rate, is the logarithm of real GDP, and ¯ is the logarithm of potential output, as determined by a linear trend. A) moved roughly together with the CPI being the most stable. Fill in the blanks. Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP equals potential GDP, then the federal funds target rate equals the; Suppose the equilibrium real federal funds rate is 2 percent, the current inflation rate is 4 percent; Chawhowhorge Brain Teaser Acording to the Taylor rule, in what direction and by how much should the Fed change the real Federal funds rate? A) Inflation targeting reduces the flexibility of the Fed to pursue other policy goals. Problem 3-8 DuPont identity ILO 3] Jiminy Cricket Removal has a profit margin of 8 percent... State whether the following are primarily microeconomic or macroeconomic policy issues:a. 31) Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. Suppose that the inflation rate is at 4.0%, leading to an inflation gap of -1.0% (equal b 2.0% - 3.0%), and real GDP is 1.5% above its potential, resulting in a positive output gap of 1.5%. A) core personal consumption expenditures price index. The Equilibrium Real Funds Rate: Past, Present and Future James D. Hamilton University of California at San Diego and NBER Ethan S. Harris Bank of America Merrill Lynch Jan Hatzius Goldman Sachs Kenneth D. West University of Wisconsin and NBER February 27, 2015 Last revised May 11, 2016 We thank Jari Stehn and David Mericle for extensive help with the modeling work in Section 6. B) the central bank commits to achieving a publicly announced level of inflation. PiA – Physik im Advent 2020 – Aufgabe 12 Lösung. 213) Suppose the equilibrium real federal funds rate is 3 percent, the target rate of inflation is 3 percent, the current inflation rate is 1 percent, and real GDP is 8 percent below potential real GDP. Suppose the Fed is following the Taylor rule, with an inflation rate of 3 percent over the past year. According to the Taylor rule, in what direction and by how much should the Fed change the real Federal funds rate? (Quantity Theory of Money) Suppose that in China the velocity of money is constant, real GDP grows by 6% per year each year, the money stock grows by 10% per year, and the nominal interest rate is 6%. Use the following information and the Taylor rule to calculate the federal funds rate target. Suppose the equilibrium real federal funds rate is 5 percent, the target rate of inflation is 3 percent, the current inflation rate is 5 percent, and real GDP is 4 percent above potential real GDP. Question: Suppose the equilibrium real federal funds rate is 2 percent, the current inflation rate is 4 percent, the target rate of inflation is 2 percent, and real GDP is 2 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals. An increase in the money supply will → Reduce interest rates and increase aggregate demand. The Taylor Rule is an interest rate forecasting model invented by famed economist John Taylor in 1992 and outlined in his 1993 study, "Discretion … Which company introduced the hexagonal shape for pencils, which later became a norm? Which of the following costs are treated as part of the cost of product? Suppose that the equilibrium real federal funds rate is 66 percent and the target rate of inflation is 33 percent. This sport is often called ‘The Sport of __ ‘ . 11) Suppose the equilibrium real federal funds rate 5 percent, 11) Suppose the equilibrium real federal funds rate 5 percent, : 1204233. Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. ScholarOn, 10685-B Hazelhurst Dr. # 25977, Houston, TX 77043,USA. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals, 12) Inflation targeting is a framework for carrying out monetary policy whereby. 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