Use the Fed rule-of-thumb to predict the Fed's target for the federal funds rate for each of the following scenarios if its estimate of the neutral interest rate is 2%. a. A recession hits the economy leading output to be 0.75% below potential output and inflation to fall to 1%. b. An increase in consumer and business confidence pushes the economy to produce output at 2% above potential output while inflation rises to 3.5%.
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- Which one of these policies should the Fed engage in if unemployment is very high and inflation is under control? Select one: a. Buy government bonds through an Open Market Operation b. Print more money and give it directly to tax payers c. Lower corporate and income taxes d. Raise the discount rate e. Lower consumer confidenceUse the Fed rule-of-thumb to predict the Fed's target for the federal funds rate and the real target interest rate t for each of the following scenarios if its estimate of the neutral real interest rate is 2%. a. A recession hits the economy, causing output to fall to 0.75% below potential output and inflation to fall to 1%. Federal funds target rate % Federal funds target rate b. An increase in consumer and business confidence pushes output to 2% above potential output, while inflation rises to 3.5%. Target real interest rate: % Target real interest rate: % %When economists speak of the "zero lower bound problem" that the Fed sometimes faces, what are they referring to? 1. It is when short term interest rates are close to zero meaning the Fed can no longer use changes in interest rates to stimulate the economy 2. It is when economic growth in the economy has reached zero percent and the Fed must use aggressive monetary policy 3. It is when the Fed has sold all the securities on its balance sheet and can no longer impact the money supply using open market operations 4. It is when banks choose to hold no excess reserves, making it impossible for the Fed to lower the discount rate
- This question is about interest rates and Fed policy.a) Define an interest rate. Define inflation, and then define real and nominal interest rates.b) In “normal” times (meaning, pre-2008), one of the main tools of the Fed was open market operations. What is the rate that the Fed would affect with this tool? What are expansionary and contractionary market operations?b) What would you want to do to the federal funds rate if the economy was in a recession? In an expansion?c) Suppose that the economy was in a recession, and the rate was close to 0. Would open market operations be effective?Calculate the Federal Funds rate for the following values of expected growth in real GDP and inflation. Assume that, as above, long-term real GDP growth is 3% and steady-state (or target) inflation is 2%. 1. Expected growth in real GDP = 5%; inflation = 5% 2. Expected growth in real GDP = 1%; inflation = 0% 3. Expected growth in real GDP = 3%; inflation = 2%What does the Taylor rule imply that policymakers should do to the fed funds rate under the following scenarios? Unemployment rises due to a recession. An oil price shock causes the inflation rate to rise by 1% and output to fall by 1%. The economy experiences prolonged increases in productivity growth while actual output growth is unchanged. Potential output declines while actual output remains unchanged. The Fed revises its (implicit) inflation target downward. The equilibrium real fed funds rate decreases.
- Suppose that the equilibrium real federal funds rate is 2.75% and the target inflation rate is 1.75%. If the current inflation is 4.25%, potential GDP is $105 billion, the current level of GDP is $103.5 billion, use the Taylor rule to find the federal funds rate that the Fed should choose.If the inflation rate is at its target rate of 2 percent and the unemployment rate is close to or at the target rate of 3.5 percent, the Fed would likely choose Multiple Choice a neutral monetary policy. to decrease the money supply with no change in interest rates an easy money policy a tight money policyAssume the inflation rate is 6% and there is every indication that price levels will continue to rise. The Fed should engage in which policy with respect to open market operations: Buy bonds Sell bonds. Increase reserve ratio Decrease reserve ratio
- You will answer the following questions listed below. You will submit a Word document that will answer the following questions. Please submit your work using proper APA formatting. What actions should the Fed take if it believes the economy is about to experience a high rate of inflation? Now, let’s assume you are the President of the Fed and you have to make certain decisions in our economy. If the Fed orders a contractionary monetary policy, describe what will happen to the following variables relative to what would have happened without the policy: The money supply Interest rates Investment Consumption Net Exports The aggregate demand curve Real GDP The price level It should be minimum 3 word count with work cited page please.Suppose the Fed commits itself to the use of the Taylor rule (shown below) to set the federal funds rate. Federal funds rate = Long - run target + 1.5(Inflation rate - Inflation target) + 0.5(Output gap) Suppose the Fed has set the long-run target for the federal funds rate at 1 percent and its target for inflation at 3 percent. If the economy is currently hitting the Fed's inflation target and GDP exactly equals the trend GDP, then the Fed will set the federal funds rate at percent. (Enter your response with no rounding.) Now suppose the economy heats up, causing the actual inflation rate to increase to 4 percent and the economy to rise 1.5 percent above trend GDP. In this case, the Fed will seek to set the federal funds rate at percent. (Enter your response with no rounding.) To achieve its target for the federal funds rate, the Fed may (Check all that apply.) O A. Increase the interest rate paid on reserves deposited at the Fed. O B. Sell Treasury bonds in the open market. O C.…When the Fed targets the amount of money in the economy, interest rates become more variable. True False