Macroeconomics 11th Edition by Michael Parkin

Exercise 45

Suppose that the Fed had followed the Taylor rule before the financial crisis of 2008. In the first quarter of 2007, the inflation rate was 2.5 percent a year and the output gap was zero. At what level would the Fed have set the federal funds rate targetThe actual federal funds rate target was 5.25 percent a year. Was the Fed restraining aggregate demand by too much or too little?