Discuss the coefficients on the inflation gap and output gap terms in the Taylor rule given in equation (1). If you could change the relative importance of the coefficients, what would you choose?
Answer to relevant QuestionsUse the following Taylor rule to calculate what would happen to the real interest rate if actual and expected inflation increased by 3 percentage points. Target federal funds rate = 2 + current inflation + ½(inflation gap) ...Based on the liquidity premium theory of the term structure of interest rates, explain how forward guidance about monetary policy can lower long-term interest rates today. Be sure to account for both future short-term rates ...Plot the Taylor Rule since 1990 on a quarterly basis (similar to Figure 18.9). For the output gap, use the percent deviations of real GDP (FRED code: GDPC1) from potential output (FRED code: GDPPOT). For inflation, use the ...Explain why a central bank is usually more effective at holding the value of its domestic currency at an artificially low level for a sustained period than at an artificially high level.Consider a small open economy with a wide array of trading partners all operating in different currencies. The economy’s business cycles are not well synchronized with any of the world’s largest economies and the ...
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