Strayer university

posted by .

Suppose that the Fed's inflation target is 2%, potential output growth is 3.5%, and velocity is a function of how much the interest rate differs from 5%: %^V= 0.5 X (i-5). Suppose that a model of the economy suggests that the real interest rate is determined by the equation r= 8.35-%^Y where Y is the level of output, so %^Y is the growth rate of output. Suppose that people expect the Fed to hit its inflation target. A- Calculate the optimal money growth rate needed for the Fed to hit its inflation target in the long run. B- In the short run, if output growth is just 2% for two years and the equation determining the real interest rate changes to r=4.5-%^Y, what money growth rate should the Fed aim for to hit its inflation target in that period? C- If the Fed intead maintained the money growth rate from part A, what is likely to happen to inflation? D- Which policy do you think is better in the short run? Which is better in the long run?

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. Macroeconomics

    Suppose the Fed wishes to use monetary policy to close an expansionary gap. a. Should the Fed increase or decrease the money supply?
  2. Economics

    Suppose last month's inflation report estimated monthly inflation to be 0.4% over the month. The monetary authorities want inflation to not exceed 2% per year. Estimates of potential output state that our economy is currently near …
  3. Economics - Please Help

    Suppose the economy has been producing its potential, but it is now experiencing a recession. Which of the following is a discretionary fiscal policy that would bring the economy closer to its potential output?
  4. Need HELP ASAP - PLEASE ` economics

    Suppose the economy has been producing its potential, but it is now experiencing a recession. Which of the following is a discretionary fiscal policy that would bring the economy closer to its potential output?
  5. Macroeconomics

    Economist John Taylor has suggested that the Fed use the following rule for choosing its target for the federal funds interest rate (r): r= 2% + ð + 1/2 (y-y*) / y* + 1/2 (ð - ð*), Where ð is the average of the inflation rate over …
  6. international economic

    2.) This question uses the general monetary model, in which L is no longer assumed constant and money demand is inversely related to the nominal interest rate. Consider the same scenario described in the beginning of the previous question. …
  7. Macroeconomics

    Can someone point me in the right direction on how to solve this?
  8. macroeconomics

    Can someone point me in the right direction on how to solve this?
  9. money and banking

    Suppose that the Fed's inflation target is 2%, potential output growth is 3.5%, and velocity is a function of how much the interest rate differs from 5%: % triangle v=0.5 x (i-5) Suppose that a model of the economy suggests that the …
  10. economics

    Suppose last month’s inflation report estimated monthly inflation to be 0.4% over the month. The monetary authorities want inflation to not exceed 2% per year. Estimates of potential output state that our economy is currently near …

More Similar Questions