Describe the Taylor rule. If the Fed were following the rule, what would the nominal Fed funds rate be if inflation over the past year were 4% and output were 1% below its full-employment level?
What will be an ideal response?
The Taylor rule is a rule for monetary policy that allows the Fed to respond to the state of the economy. The rule sets the nominal Fed funds rate as the sum of the inflation rate over the past year plus 2% plus one half times the percentage deviation of output from its full-employment level plus one half times the amount by which inflation over the past year exceeds 2%. If inflation were 4% and output were 1% below its full-employment level, the nominal Fed funds rate would be 0.04 + 0.02 + (0.5 × -0.01 ) + [0.5 × (0.04 - 0.02)] = 0.065 = 6.5%.
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The marginal rate of substitution measures
A) the willingness of a consumer to exchange a good with another consumer. B) the willingness of a consumer to pay the form for a good. C) the value in dollars of the last unit of good obtained by the consumer. D) the rate at which a consumer is willing to exchange one good for another.
The more dollars that must be given up to buy one British pound, the __________ American goods are for the British and the __________ American goods the British will buy; thus __________ dollars will be demanded
A) more expensive; fewer, more B) less expensive; more, more C) more expensive; fewer, fewer D) less expensive; fewer, more E) none of the above