Homework Soursesuppose the the equilibrium real federal funds rate is 4 per
suppose the the equilibrium real federal funds rate is 4 percent and the target rate of inflation of 1 percent. Use the following information and the Taylor rule to calculate the federal funds rate target.
Current inflation rate = 4 percent
Potential real GDP = $14.72 trillion
Real GDP = $14.81 trillion
The federal funds target rate is ___%
The answer is 9.81%
But I was wonder could you show me how to get that answer.
Please show your work clearly and neatly please.
suppose the the equilibrium real federal funds rate is 4 percent and the target rate of inflation of 1 percent. Use the following information and the Taylor rule to calculate the federal funds rate target.
Current inflation rate = 4 percent
Potential real GDP = $14.72 trillion
Real GDP = $14.81 trillion
The federal funds target rate is ___%
The answer is 9.81%
But I was wonder could you show me how to get that answer.
Please show your work clearly and neatly please.
suppose the the equilibrium real federal funds rate is 4 percent and the target rate of inflation of 1 percent. Use the following information and the Taylor rule to calculate the federal funds rate target.
Current inflation rate = 4 percent
Potential real GDP = $14.72 trillion
Real GDP = $14.81 trillion
The federal funds target rate is ___%
The answer is 9.81%
But I was wonder could you show me how to get that answer.
Please show your work clearly and neatly please.
Solution
Output gap = (Real GDP - Potential GDP) / Potential GDP = (14.81 - 14.72) / 14.72 = 0.09/14.72 = 0.0061 = 0.61%
Target Federal Funds Rate (FFR) = Current Inflation rate + Equilibrium real FFR + 0.5 x (Current inflation rate - Target inflation rate) + 0.5 x Output gap
= 4% + 4% + 0.5 x (4% - 1%) + (0.5 x 0.61%)
= 8% + 0.5 x 3% + 0.31%
= 8.31% + 1.5%
= 9.81%
