a) Using the simple monetary rule, show how the Fed can mitigate the impact of the...
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a) Using the simple monetary rule, show how the Fed can mitigate the impact of the financial shock on output by changing its inflation target away from = 2%. Use both the IS-MP and AS/AD diagrams and explain. Should the Fed raise or lower ? b) Use numbers to compute the change in inflation and output. Assume the shock to f equals 4% and lasts one period. Let 5 = 1/2, m = 1/2,0 = 1/2, and F= 296. Initial inflation equals 2% and a = 0. Determine the fed funds rate the Fed needs to set to keep short-run output equal to zero. Give both the real and nominal fed funds rates. c) Suppose the shock f is larger and equals 6%. What is the nominal fed funds rate that will keep short- run output equal to zero, now? Can the Fed do this? Explain what happens if the Fed cannot set a nominal interest rate less than zero. d) Briefly, describe one policy the Fed might take in circumstances such as you found for part c) when f = 6%- a) Using the simple monetary rule, show how the Fed can mitigate the impact of the financial shock on output by changing its inflation target away from = 2%. Use both the IS-MP and AS/AD diagrams and explain. Should the Fed raise or lower ? b) Use numbers to compute the change in inflation and output. Assume the shock to f equals 4% and lasts one period. Let 5 = 1/2, m = 1/2,0 = 1/2, and F= 296. Initial inflation equals 2% and a = 0. Determine the fed funds rate the Fed needs to set to keep short-run output equal to zero. Give both the real and nominal fed funds rates. c) Suppose the shock f is larger and equals 6%. What is the nominal fed funds rate that will keep short- run output equal to zero, now? Can the Fed do this? Explain what happens if the Fed cannot set a nominal interest rate less than zero. d) Briefly, describe one policy the Fed might take in circumstances such as you found for part c) when f = 6%-
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SOLUTION a The simple monetary rule states that the central bank should adjust its policy interest rate to keep output at its natural level in response to unexpected changes in the price level caused ... View the full answer
Related Book For
Macroeconomics Principles, Applications, and Tools
ISBN: 978-0132555234
7th Edition
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez
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