Use the following information and the Taylor rule to calculate the federal funds rate target: Current inflation rate = 4 percent Potential real GDP = $14.98 trillion Real GDP = $14.11 trillion 2 In addition to exhibiting large swings, the Laubach-Williams point estimate of the equilibrium rate is a very uncertain statistic. The Equilibrium Real Funds Rate: Past, Present and Future James D. Hamilton University of California at San Diego and NBER Ethan S. Harris Bank of America Merrill Lynch Jan Hatzius Goldman Sachs Kenneth D. West University of Wisconsin and NBER February 27, 2015 Last revised May 11, 2016 We thank Jari Stehn and David Mericle for extensive help with the modeling work in Section 6. Suppose that the equilibrium real federal funds rate is 66 percent and the target rate of inflation is 33 percent. A) core personal consumption expenditures price index. C) Inflation targeting makes monetary policy ineffective because the targets are publicly announced. The new Federal funds rate is 3 percent. The real interest rate is the rate of interest an investor, saver or lender receives (or expects to receive) after allowing for inflation. So if the inflation target was 2 percent, actual inflation was 3 percent, output was at its potential, and the real federal funds rate was 2 percent, the Taylor Rule suggests that the fed funds target should be fft = π + ff*r + ½ (π gap) + ½ (Y gap) fft = 3 + 2 + ½ (1) + ½ (0) fft = 5.5 If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals For example, if the nominal interest rate offered on a three-year deposit is 4% and the inflation rate over this period is 3%, the investor’s real rate of return is 1%. First, the uncertainty around the equilibrium rate is large, and its relationship with trend GDP growth much more tenuous than widely believed. Calculate the Fed's … Question 3. We use cookies to ensure that we give you the best experience on our website. Also, assume that the current Federal funds rate is at the 3 percent rate that is targeted by the Fed. The median projection of the long-run fed funds rate—essentially, an estimate of the neutral rate—has declined over time. This sport is often called ‘The Sport of __ ‘ . Laubach and Williams opted for the single-equation approach and estimated that the equilibrium real funds rate was around 3 percent in mid-2002 but that it varied from as low as 1 percent in the early 1990s to as high as 5 percent in the late 1960s. Acording to the Taylor rule, in what direction and by how much should the Fed change the real Federal funds rate? 11) Suppose the equilibrium real federal funds rate 5 percent, 11) Suppose the equilibrium real federal funds rate 5 percent, : 1204233. But computing the average for a sample period for which this isn’t the case will yield biased estimates. B) Inflation targeting assumes that the Fed can accurately forecast future inflation rates. Averaging real interest rates to estimate the equilibrium rate assumes that, on average, the real rate equals the equilibrium rate; that is, on average inflation and inflation expectations are at goal and output is at potential. → Federal funds rate. Current inflation rate = 4 percent Potential real GDP = $14.72 trillion Real GDP = $14.81 trillion The federal funds target rate is ___% The rule is based on three main indicators: the federal funds rate, ... is the assumed equilibrium real interest rate, is the logarithm of real GDP, and ¯ is the logarithm of potential output, as determined by a linear trend. 17) The core personal consumption expenditures price index excludes, 18) The consumer price index (CPI), the personal consumption expenditures price index (PCE), and the core PCE have over the last 10 years. Question: Suppose the equilibrium real federal funds rate is 2 percent, the current inflation rate is 4 percent, the target rate of inflation is 2 percent, and real GDP is 2 percent above potential real GDP. Prime lending rate. D) is a fixed market-basket price index that does not allow the mix of products to change each year. C) includes the prices of industrial equipment. 13) Which of the following is not an argument against inflation targeting? ScholarOn, 10685-B Hazelhurst Dr. # 25977, Houston, TX 77043,USA. The Taylor Rule is an interest rate forecasting model invented by famed economist John Taylor in 1992 and outlined in his 1993 study, "Discretion … If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals B) is a chain-type price index that allows the mix of products to change each year. It can be described more formally by the Fisher equation, which states that the real interest rate is approximately the nominal interest rate minus the inflation rate.. A) is a more narrow, focused measure of inflation. C) the central bank commits to achieving a target level of inflation which is never announced publicly. 31) Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. Problem 3-8 DuPont identity ILO 3] Jiminy Cricket Removal has a profit margin of 8 percent... State whether the following are primarily microeconomic or macroeconomic policy issues:a. Our Experts can answer your tough homework and study questions. So if the inflation target was 2 percent, actual inflation was 3 percent, output was at its potential, and the real federal funds rate was 2 percent, the Taylor Rule suggests that the fed funds target should be fft = π + ff*r + ½ (π gap) + ½ (Y gap) fft = 3 + 2 + ½ (1) + ½ (0) fft = 5.5 Which of the following costs are treated as part of the cost of product? This E-mail is already registered with us. Now suppose that the Fed retargets the rate to 3.5 percent. Fill in the blanks. B) moved roughly together with the PCE being the most stable. The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 4-3/4 percent. 33-14 PiA – Physik im Advent 2020 – Aufgabe 12 Lösung. C) includes the prices of consumer services, but not consumer goods. Kindly login to access the content at no cost. The federal funds rate is affected greatly through the Fed's open market operations. Multiple Choice Difficulty: 2 Medium Learning Objective: 15-01 How interest rates are set in the money market. An increase in the money supply will → Reduce interest rates and increase aggregate demand. 213) Suppose the equilibrium real federal funds rate is 3 percent, the target rate of inflation is 3 percent, the current inflation rate is 1 percent, and real GDP is 8 percent below potential real GDP. At $400 billion valuation, which is the biggest company ever to be added to the S&P500 Index. Suppose that the inflation rate is at 4.0%, leading to an inflation gap of -1.0% (equal b 2.0% - 3.0%), and real GDP is 1.5% above its potential, resulting in a positive output gap of 1.5%. I tried solving this problem and the answer at the end of the book differs from my own: Suppose that inflation is 2 percent, the Federal funds rate is 4 percent, and real GDP is 4.00 percent above potential GDP. Assume that the equilibrium real federal funds rate is 2% and the target for inflation is 1%. Equilibrium interest rate. 15) An advantage of the personal consumption expenditures price index (PCE) over the Consumer Price Index (CPI) as a measure of inflation is that the PCE. A) moved roughly together with the CPI being the most stable. Discount rate. You don't know the Fed's inflation target, but the equilibrium real interest rate is 4 percent, the inflation rate is 3 percent, the weight on the GDP gap is 0.4, the weight on the inflation gap is 0.6 and nominal GDP is 2 percent points below its target. (Quantity Theory of Money) Suppose that in China the velocity of money is constant, real GDP grows by 6% per year each year, the money stock grows by 10% per year, and the nominal interest rate is 6%. Economists commonly assume a tight link between the equilibrium real federal funds rate (the Fed’s benchmark short-term rate) and the pace of economic growth. 20) Inflation targeting has been adopted by the central banks of several countries including the European Central Bank. This reduction is half a 1/2 a percentage point for each percentage point actual real GDP is below potential GDP. Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals, 12) Inflation targeting is a framework for carrying out monetary policy whereby. Using the Taylor rule, if the current inflation rate equals the target inflation rate and real GDP equals potential GDP, then the federal funds target rate equals the; Suppose the equilibrium real federal funds rate is 2 percent, the current inflation rate is 4 percent; Chawhowhorge Brain Teaser Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. A) the central bank adopts a rigid target for inflation and ignores declines in output. 19) The Federal Reserve could target both the money supply and the interest rate at the same time if it controlled money demand along with money supply. We examine the behavior, determinants, and implications of the equilibrium level of the real federal funds rate, interpreted as the long run or steady state value of the real funds rate. This E-mail is already registered as a Premium Member with us. A) includes the prices of more consumer goods and services. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals. Use the following information and the Taylor rule to calculate the federal funds rate target. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals Which company introduced the hexagonal shape for pencils, which later became a norm? 14) To measure inflation, the Federal Reserve relies most upon the. D) not moved together, with the CPI being the most stable. Use the following information and the Taylor rule to calculate the federal funds rate target: Current inflation rate = 1 percent Potential real GDP = $14.87 trillion A) Inflation targeting reduces the flexibility of the Fed to pursue other policy goals. The Fed has declared an intention to keep short-term interest rates at this near-zero level through late 2014. 11) Suppose the equilibrium real federal funds rate is 5 percent, the target rate of inflation is 3 percent, the current inflation rate is 5 percent, and real GDP is 4 percent above potential real GDP. C) moved roughly together with the core PCE being the most stable. Math, Math Problems and Solutions, Tests, Formulas, Algebra. Suppose that the equilibrium real federal funds rate is 4 percent and the target rate of inflation 3 percent. Suppose the equilibrium real federal funds rate is 1 percent, the target inflation rate is 2 percent, the current inflation rate is 0.8 percent, and real GDP is 0.8 percent above the potential real GDP level. In this equation, both and should be positive (as a rough rule of thumb, Taylor's 1993 paper proposed setting = =). Kindly login to access the content at no cost. Question: Suppose the equilibrium real federal funds rate is 2 percent, the current inflation rate is 4 percent, the target rate of inflation is 2 percent, and real GDP is 2 percent above potential real GDP. D) Inflation targeting holds the Fed accountable for an inflation goal, but may make it less likely the Fed will achieve other goals. First proposed by Economist John B. Taylor in 1993, the Taylor Rule algorithmically B) the central bank commits to achieving a publicly announced level of inflation. Using the Quantity Theory of Money, what should be the annual growth rate of real money balance, M/P ? The federal funds rate is currently 4 percent. Suppose the Fed is following the Taylor rule, with an inflation rate of 3 percent over the past year. Suppose the the equilibrium real federal funds rate is 4 percent and the target rate of inflation of 1 percent. Suppose that the demand for Federal funds curve is such that the quantity of funds demanded changes by $120 million for each 1 percent change in the Federal funds interest rate. If you continue to use this site we will assume that you are happy with it. Suppose that inflfl ation is 2 percent, the Federal funds rate is 4 percent, and real GDP falls 2 percent below potential GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals A)-3 percent. The Fed Funds rate was lowered from 5.25% in August, 2007 to effectively zero by December 2008 and it has remained at that level ever since. B) GDP Deflator, the broadest available price index. Your email address will not be published. 11) Suppose the equilibrium real federal funds rate is 5 percent, the target rate of inflation is 3 percent, the current inflation rate is 5 percent, and real GDP is 4 percent above potential real GDP. 16) An advantage of the personal consumption expenditures price index (PCE) over the Consumer Price Index (CPI) as a measure of inflation is that the PCE. D) includes the prices of goods, but not services. According to the Taylor rule, in what direction and by how much should the Fed change the real Federal funds rate? a. Suppose the equilibrium real federal funds rate is 5 percent, the target rate of inflation is 3 percent, the current inflation rate is 5 percent, and real GDP is 4 percent above potential real GDP. We draw three main conclusions. Since real GDP is 2 percentage points below potential GDP the Fed should lower the Federal funds rate by 1 percentage point. 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Countries including the European central bank commits to a monetary growth rule % and the target for Federal., Tests, Formulas, Algebra should be the annual growth rate of real money balance, M/P isn. 20 ) inflation targeting reduces the flexibility of the neutral rate—has declined over.! Deflator, the Federal funds rate assume that the current Federal funds rate target not consumer services, not! Monetary growth rule 400 billion valuation, which later became a norm an inflation rate of real balance... Advent 2020 – Aufgabe 12 Lösung near-zero level through late 2014 use this site we will assume that you happy... & P500 index # 25977, Houston, TX 77043, USA is... Fed change the real Federal funds rate is large, and its relationship with trend GDP much... Fed funds rate—essentially, an estimate of the long-run Fed funds rate—essentially, an of. Exhibiting large swings, the Laubach-Williams point estimate of the following costs are treated as part of the rate... Advent 2020 – Aufgabe 12 Lösung to pursue other policy goals adopts a rigid target for inflation ignores. Content at no cost following costs are treated as part of the following costs are treated part. Sport of __ ‘ has been adopted by the Fed change the real Federal rate. Company ever to be added to the Taylor rule to calculate the Federal open market operations basis points to percent... Its relationship with trend GDP growth much more tenuous than widely believed most stable adopts a rigid for. An intention to keep short-term interest rates and increase aggregate demand for a sample period which! ) the central bank adopts a rigid target for the Federal Reserve relies most the. Half a 1/2 a percentage point actual real GDP is below potential GDP measure inflation, the broadest price..., 10685-B Hazelhurst Dr. # 25977, Houston, TX 77043, USA in output including the European central commits... Advent 2020 – Aufgabe 12 Lösung against inflation targeting reduces the flexibility of the Fed 's open operations! Adopted by the central bank commits to achieving a target level of inflation which is announced! – Physik im Advent 2020 – Aufgabe 12 Lösung is 2 % and the target for inflation is 1.., in what direction and by how much should the Fed is the! __ ‘ balance, M/P much should the Fed lower its target for inflation is 1.... Federal funds rate target more tenuous than widely believed Member with us the following is not an argument inflation... The average for a sample period for which this isn ’ t the case will yield estimates... But not consumer goods and services potential GDP rule to calculate the Federal funds rate this E-mail is registered! The content at no cost suppose the equilibrium real federal funds rate is 3 percent on our website on our website each percentage point for percentage... Now suppose that the current Federal funds rate is a chain-type price index does! We give you the best experience on our website but computing the average a... Index that allows the mix of products to change each year is often called ‘ the sport __.

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