Economics Study Set 4
Quiz 26: Monetary Policy
The Fed Has Adopted an Interest Rate Target for Most
The Fed has adopted an interest rate target for most of the time since World War II.
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The Federal Reserve's performance in the mid-to-late 1980s,1990s,and early 2000s has received high marks from economists,even without inflation targeting.
Using the money demand and money supply model,show and explain why the Federal Reserve cannot achieve a target for both the money supply and an interest rate.
Consider the Taylor rule for the target of the federal funds rate.Suppose the equilibrium real federal funds rate is 2 percent,the target rate of inflation is 3 percent,the current inflation rate is 3 percent,real GDP equals potential real GDP,and the weights are 1/2 for the inflation gap and the output gap.Using the Taylor rule,what does the target for the federal funds rate equal? Next,if the Federal Reserve lowered the target for the inflation rate to 1 percent,how much would the target for the federal funds rate change?
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