Scenario: Taylor Rule Suppose that the Federal Reserve is following the Taylor rule, which takes both inflation and business cycles into account i setting the federal funds rate. Also suppose that the inflation rate in the economy is 5 % and that the unemployment gap is 2 % . In this case, the Federal Reserve will set the federal funds rate at % .

Scenario: Taylor Rule Suppose that the Federal Reserve is following the Taylor rule, which takes both inflation and business cycles into account i setting the federal funds rate. Also suppose that the inflation rate in the economy is 5 % and that the unemployment gap is 2 % . In this case, the Federal Reserve will set the federal funds rate at % .

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter27: Issues In Macroeconomic Theory And Policy

Section: Chapter Questions

Problem 5P

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Would a monetary policy intended to bring about disinflation cause a greater increase in unemployment if workers and firms have adaptive expectations or if they have rational expectations. Briefly explain. 1. 2. Why is the credibility of the State Bank's policy announcements particularly important? 3. Why do workers, firms, banks and investors in financial markets care about the future rate of inflation? 4. Why do most economists agree that it is important to have a country's central bank to be independent of the country's central government? 5. How does an increase in interest rates affect aggregate demand? Briefly discuss how each component of aggregate demand is affected. If the State Bank believes the economy is about to fall into recession, what actions should it take? 6. 7. If the State Bank believes the inflation rate is about to increase, what actions should it take? 8. What is the main difference between M1 and M2 definitions of the money supply? 9. Explain the Consumption…
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