Question

Using the Taylor rule, calculate the target for the federal funds rate for July 2010 using the following information: 

Equilibrium real federal funds rate 2% 

Target inflation rate 2% 

Current inflation rate 0.9% 

Output gap  -6%

The target for the federal funds rate for July 2010 is _______ %. (Enter your response rounded to two decimal places and include a minus sign if necessary) 

In your calculations, the inflation gap is negative if the current inflation rate is below the target inflation rate. How does the targeted federal funds rate calculated using the Taylor rule compare to the actual federal funds rate of 0% to 0.25%? 

 A. This Taylor rule federal funds rate target is lower than the Fed's actual target range, 

 B. This Taylor rule federal funds rate target is higher than the Fed's actual target range 

 C. This Taylor rule federal funds rate target fits within the Fed's actual target range,

Answer 1

Ans.

Formula , according to the taylor rule ,

Target FFR = Equi. federal funds rate + Current inflation rate + 1/2 ( Current inflation rate - Target inflation rate ) + 1/2 x Output Gap

                    = 2 + 0.9 + 1/2 ( 0.9 - 2 ) + 1/2 x ( - 6 )

                    = 2.9 - 0.55 - 3

                    = - 0.65

Correct Option is A.

because the value is - 0.65. which is lower than 0 to 0.25.

------------------------------------------------------------------------------------------------------