Suppose the Fed is using the Taylor rule. It wants an inflation rate of 2 percent and
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Suppose the Fed is using the Taylor rule. It wants an inflation rate of 2 percent and a full-employment real funds rate of 3 percent. It weights excess inflation by 0.5 and the GDP gap (the percent gap between real GDP and the full-employment level of GDP) by 0.5. If inflation is running at 5 percent and real GDP is 4 percent above its full-employment level, what real federal funds rate will the Fed target? If the rate is below this level, will it buy or sell bonds to achieve this target level? What if the rate is above this level?
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The formula will be r 3 percent 5 percent 05 5 percent 2 percent 05 4 percent Thus the ...View the full answer
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