Taylor Rule. Suppose the Quarter 1 2020 federal funds rate was 0.25%. If the output gap...

Taylor Rule. Suppose the Quarter 1 2020 federal funds rate was 0.25%. If the output gap is -7% and the inflation gap is -5%, according to the Taylor Rule, what is the Fed’s target rate for Quarter 2 of 2020?

Expert Solution

According to Taylor Rule,

Fed’s target rate = Federal funds rate + 0.5 (Output gap) + 0.5 * (Inflation gap).

Fed’s target rate for Quarter 2 of 2020 = 0.25% + 0.5 (-7%) + 0.5 * (-5%)

= 0.25% - 3.5% - 2.5%

= -5.75%

Rahul Sunny answered 2 years ago

If the federal funds rate is set by the Taylor rule and the inflation rate increases...

If the federal funds rate is set by the Taylor rule and the inflation rate increases by 3 percentage points, everything else remaining unchanged, the federal funds rate for a given inflation target should increase by 4.5 percentage points decrease by 1.5 percentage points increase by 3 percentage points decrease by 3 percentage points

According to the Taylor Rule, if the output gap falls by 2% and the inflation gap...

According to the Taylor Rule, if the output gap falls by 2% and the inflation gap rises by 1%, then the real federal funds rate should be Select one: A. lowered by 1.0%. B. lowered by 0.5%. C. left unchanged. D. raised by 1.0%.

state the taylor rule for choosing a target federal funds rate. if current inflation is 5%...

state the taylor rule for choosing a target federal funds rate. if current inflation is 5% and target inflation equals 2% and current output is 1% and potential output is 3%, what should the fed do according to the taylor rule? dicuss, including an indication of thr effect on the economy.

Use the following information for a Taylor rule. The equilibrium real federal funds rate is 2%,...

Use the following information for a Taylor rule. The equilibrium real federal funds rate is 2%, the inflation target is 2% and the (real) output growth target is 3%. a) If actual inflation is 3% and actual output growth is 4%, find the federal funds rate recommended by the Taylor rule. b) If actual inflation is 1% and actual output growth is 1%, find the federal funds rate recommended by the Taylor rule. How do these numbers compare with the actual...

1. According to the Taylor rule, if there is an expansionary gap of 2 percent of...

1. According to the Taylor rule, if there is an expansionary gap of 2 percent of potential output and inflation is 3 percent, what real interest rate will the Fed set? A) 1.5 percent B) 2 percent C) 3.5 percent D) 2.5 percent 2. The money demand curve will shift to the right if: A) the price level decreases. B) the price level increases. C) the nominal interest rate increases. D) the nominal interest rate decreases 3. The aggregate demand...

After the Financial Crisis of 2007-2009, the Federal Reserve dropped the Federal Funds rate to 0.25%...

After the Financial Crisis of 2007-2009, the Federal Reserve dropped the Federal Funds rate to 0.25% until late 2015. Between December 2015 and December 2018, the Fed steadily increased that rate to 2.5%. Provide your opinion on how banks should react to the Federal reserve expectations for interest rates in 2019.

fully explain how the inflation and ouput gap are related to the Taylor Rule in financial...

fully explain how the inflation and ouput gap are related to the Taylor Rule in financial economics

1. Suppose the Federal Reserve raises its target for the federal funds rate while interest rates...

1. Suppose the Federal Reserve raises its target for the federal funds rate while interest rates in other countries do not change. The result will be a. an outflow of financial capital, a decrease in demand for U.S. dollars, and a depreciation of the U.S. dollar. b. an inflow of financial capital, a decrease in demand for U.S. dollars, and a depreciation of the U.S. dollar. c. an inflow of financial capital, an increase in demand for U.S. dollars, and...

Suppose that the Federal Reserve sets its target for the federal funds rate at a range...

Suppose that the Federal Reserve sets its target for the federal funds rate at a range of 0.25 to 0.50 percent. This means that the discount rate on primary loans will be set at ____ percent and the discount rate on secondary loans will be set at ___ percent. 1.00; 1.50 1.00; 0.50 0.50; 1.00 1.25; 1.50 1.50; 1.00 2. Which of the following is an example of an operating target that can potentially be used by the federal reserve?...

(3) On March 15, 2020, the Federal Reserve lowered its target for the federal funds rate...

(3) On March 15, 2020, the Federal Reserve lowered its target for the federal funds rate to a range of 0% to 0.25%. Please answer the following questions: (a) What is the difference between the federal funds rate and the discount rate? Which does the Federal Reserve actually control? (b) Why does a lower federal funds rate incentivize lending and why might that be a goal that the Federal Reserve currently has?

Question