Assume that the equilibrium real federal funds rate is 2% and the target for inflation is 2.0%. Suppose that the inflation rate isat 5.0%, leading to an inflation gap of 3.0% (equal to 5.0% -2.0%), and real GDP is 1.5% above its potential, resulting in apositive output gap of 1.5%. The Taylor rule suggests that the federal funds rate should be set at:OA. 5.25%.OB. 7.25%.C. 8.00%.OD. 9.25%.

D. 25% Taylor rule suggests that the federal funds rate should be set at 9.25% Taylor's rule…

Answered: 2.0%), and real GD e federal funds…

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2.0%), and real GD e federal funds rater

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Cost of Credit

The cost of credit is an extra amount that the borrower has to pay besides the loan amount. These credit charges may vary from loan to loan. The cost of credit includes interest charges, maintenance charges, and arrangement charges. Some of the costs are mandatorily collected by the lender based on the loan amount and tenure of the loan. The cost of credit is also called finance charges of the credit.

Question

Assume that the equilibrium real federal funds rate is 2% and the target for inflation is 2.0%. Suppose that the inflation rate is
at 5.0%, leading to an inflation gap of 3.0% (equal to 5.0% -2.0%), and real GDP is 1.5% above its potential, resulting in a
positive output gap of 1.5%. The Taylor rule suggests that the federal funds rate should be set at:
OA. 5.25%.
OB. 7.25%.
C. 8.00%.
OD. 9.25%.

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