typing please A. write down the equation for the taylor rule for monetary policy

Question

typing please

A. write down the equation for the taylor rule for monetary policy. explain what each term in the equation means, in one sentence.

B. suppose the fed is following the taylor rule. suppose the growth rate for potential outputis 3 percent, the output gap is 6 percent, the weights on the output gap and inflation gap are each 1/2 the fed's inflation target is 2 percent, the fed believes the equilibrium real fedral funds rate is 3 percent, and the inflation rate has been 2 percent over the past year. At what level does the fed set the federal funds rate ?

C. suppose the fed thinks that the equilibrium federal funds rate is 3 percent, as in part b above, but in fact the equilibrium real fed funds rate is 4 percent. what do you think will happen to the inflation rate in the long run ?

Explanation / Answer

i = r* + pi + 0.5 (pi-pi*) + 0.5 (y-y*)

Where:

i = nominal fed funds rate

r* = real federal funds rate I =

pi = rate of inflation

p* = target inflation rate

Y = logarithm of real output

y* = logarithm of potential output

B)

I = .03+.02+0.5*(0.02-0.02)+0.5(0.06-0.03)

i = 0.065 = 6.5 %

C)

Pi = i-r*-0.5*(Pi-P*)-0.5*(y-y*)

Pi = 0.065-0.04-0.5*0+0.5*(0.03) = 0.04 = 4%

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