Answer to Question #191247 in Macroeconomics for James

Question

Using the Taylor Rule, find the appropriate Federal Funds rate (FFR).

Assume that the Fed has  target inflation rate of 2% and a target GDP growth rate of 3%. What FFR should the Fed target if the current inflation is 1% and the growth rate is 2%?

Enter the number without the percent sign.

Answer 1

We know that,

r = p + 0.5 * y + 0.5 * (p - 2) + 2

where, r = Federal funds Rate (FFR)

p = Inflation Rate

y = Real GDP Gap

a) r = ?

p = 2%

y = 3%

r = 2 + 0.5 * 3 + 0.5 * (2-2) +2

r = 2 + 1.5 +2

r = 5.5 %

b) r = ?

p = 1%

y = 2%

r = 1 + 0.5 * 2 + 0.5 * (1-2) +2

r = 1+ 1 - 0.5 + 2

r = 3.5 %