Write out the expression for the Taylor rule. Use the Taylor rule to explain how a decline in real GDP below potential GDP will affect the Federal Reserve's target for the federal funds rate
What will be an ideal response?
The Taylor rule states that the Fed should set the federal funds target so that it is equal to: the real equilibrium federal funds rate + the current inflation rate + (w1 ) × inflation gap + (w2 ) × output gap. The inflation gap is the difference between the current inflation rate and the target rate. The output gap is the percentage difference between real GDP and potential GDP. The values w1 and w2 are weights determined by the Fed. If the growth rate in real GDP is below potential GDP, then the output gap will be negative. This will lower the federal funds target.
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The impact of monetary policy on prices and output depends on the
A. regulations passed by Congress. B. cooperation from business leaders. C. slope of the aggregate demand curve. D. slope of the aggregate supply curve.
If the economy has a natural unemployment rate of 4 percent and potential GDP of $5 trillion, what will be real GDP according to Okun's Law if the unemployment rate rises to 5 percent?
What will be an ideal response?