Exam 18: Rules for Monetary Policy

Suppose the economy is thought to be 1 percent below its potential output (i.e., the output gap is −1 percent).The potential output is growing at 4% a year.Suppose the Fed is following the Taylor rule, with an inflation rate of 4 percent over the past year.The equilibrium real fed funds rate is 3 percent, the weight on the output gap is 0.75 and the weigh on the inflation gap is 0.25.The inflation target is 1 percent.What should the federal funds rate be?

In general, periods in which the Taylor rule suggested tighter monetary policy than the Fed actually put in place are periods of rising inflation.Periods in which the Taylor rule suggested that monetary policy should be easier than the Fed actually put in place are periods of declining inflation.Describe a recent exception to these results.

When the central bank chooses a policy at one date, which leads people to make decisions based on that policy, which then causes the central bank to choose a different policy at a later date, then there is said to be

What are the major advantages and disadvantages of inflation targeting?

Which of the following is a disadvantage of inflation targeting?​

If a dollar of money is used 5 times in transactions in an economy over the course of a year and the supply of money is $120 billion, what is the volume of total spending in the economy?

A central bank that is explicit about its goals and plans is said to be

Suppose the Fed follows the Taylor rule.Which of the following is likely to happen if the Fed overestimates potential output​?

How does a central bank establish credibility?

If a shock raises inflation, how fast should the central bank reduce it to its target level?

Suppose the economy is thought to be 2 percent above potential (i.e., the output gap is 2 percent), when potential output grows 4 percent per year.Suppose the Fed is following the Taylor rule, with an inflation rate of 2 percent over the past year.The federal funds rate is currently 3 percent.The equilibrium real fed funds rate is 3 percent and the weights on the output gap and inflation gap are 0.5 each.The inflation target is 1 percent. a.Is the fed funds rate currently too high or too low? By how much? Show your work. b. Suppose a year has gone by, output is now just 1 percent above potential, and inflation rate was 1.5 percent over the year.What federal funds rate should the Fed now set (assuming the inflation target does not change)?

What challenges do policymakers and researchers face in using the Taylor rule?

Suppose the economy is thought to be 2 percent below potential (i.e., the output gap is ?2 percent), when potential output grows 4 percent per year.Suppose the Fed is following the Taylor rule, with an inflation rate of 3 percent over the past year.The federal funds rate is currently 3 percent.The equilibrium real fed funds rate is 3 percent and the weights on the output gap and inflation gap are 0.5 each.The inflation target is 1 percent. a.Is the fed funds rate currently too high or too low? By how much? Show your work. b.Suppose that all the conditions are the same as described above, except that the output gap is +2 percent instead of ?2 percent.Is the fed funds rate currently too high or too low? By how much? Show your work. c.Suppose a year has gone by, output is now 3 percent above potential, and the inflation rate was 4.5 percent over the year.What federal funds rate should the Fed now set (assuming the inflation target does not change)? Show your work.

Taylor's rule implies that monetary policy should have been easier than the Fed's actual policy in the

A money-growth rule that responds to the state of the economy is____ rule.

If the velocity of money is 8.2, the money supply is $223 billion, and real output is $958 billion, what is the price level?

Total spending divided by the money supply equals

If monetary policy is not set by a rule, it is said to be set by

A system in which the central bank attempts to achieve a certain rate of change in the overall price level within some period is referred to as

Suppose the economy is thought to be 1 percent below potential (i.e., the output gap is −1 percent), when potential output grows 4 percent per year.Suppose the Fed is following the Taylor rule, with an inflation rate of 4 percent over the past year.The equilibrium real fed funds rate is 3 percent and the weights on the output gap and inflation gap are 0.5 each.The federal funds rate is 8.5 percent.What is the inflation target?