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We are using data from1976-01-01to answer this question.

a) (5 points) Using the original Taylor Rule where the equilibrium real rate of interest is estimated to be 2% and the target inflation rate is 2%, what is the federal funds rate implied by the Taylor Rule?

b) (5 points) Using the Mankiw Rule, what is the federal funds rate implied by the Mankiw Rule?

c) (5 points) According to the Taylor Rule, was the Fed being hawkish or dovish during this period? Explain and be specific with numbers.

d) (10 points) Relate your answer in part c) to the work done by Kydland and Prescott.

e) (10 points) Draw a reserve market diagram (reserve supply and reserve demand) locating the point associated with the actual federal funds rate on 1976-01-01 as point A.We don't know what reserve supply so just label as R_S. Now assuming a stable reserve demand curve, explain and show what the Fed would have had to do to obtain the federal funds rate implied by the Taylor rule. Label this point as point B.

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