Question 1

Assume the current inflation rate is 2.4% and output is at the full-employment level.If the central bank has set nominal interest rates at 5.6%, what is the central bank's inflation target if it follows the Taylor rule?

Accepted Answer

The answer of Assume the current inflation rate is 2.4%...

Question 2

According to the Taylor rule, if the central bank announced a zero percent inflation target but the current inflation rate is 2% and output is at the full-employment level, at what level should the central bank set the nominal interest rate?

Accepted Answer

The answer of According to the Taylor rule, if the...

Question 3

According to the Taylor rule, if the central bank announced a zero percent inflation target but the current inflation rate is 2% and output is 2% below the full-employment level, at what level should the central bank set the nominal interest rate?

Accepted Answer

According to the Taylor rule, the nominal interest rate should be set based on the target inflation rate, the deviation of actual inflation from the target, and the deviation of output from its full-employment level. If the central bank has announced a zero percent inflation target but the current inflation rate is 2%, then there is an inflation gap of 2% that needs to be closed. Moreover, if output is 2% below the full-employment level, then there is an output gap of 2% that needs to be closed. According to the Taylor rule, the nominal interest rate should be set as:

Nominal interest rate = target federal funds rate + (1.5 x inflation gap) + (0.5 x output gap)

Substituting the given values, we get:

Nominal interest rate = 0 + (1.5 x 2) + (0.5 x 2) = 4%

Therefore, the central bank should set the nominal interest rate at 4%.

Question 4

Short-run monetary policy changes should

Accepted Answer

Short-run monetary policy changes should allow for modest adjustments once feedback from previous changes is available. This is because monetary policy is not an exact science, and it is important to gather feedback and data before making further adjustments. Completely ignoring fiscal policy changes (A) or blindly sticking to announced policy targets (D) can be detrimental. While uncertainty may exist (C), it is necessary to make informed decisions based on available information.

Question 5

According to the Taylor rule, if the current inflation rate is 3.2%, output is 1% above the full-employment level, and the central bank's announced inflation target is 2%, at what level should the central bank set the nominal interest rate?

Accepted Answer

The Taylor rule suggests that the central bank should set the nominal interest rate to 3% in this situation. The Taylor rule is a formula that central banks use to set interest rates. It takes into account the current inflation rate, the output gap, and the central bank's inflation target. In this case, the current inflation rate is 3.2%, output is 1% above the full-employment level, and the central bank's announced inflation target is 2%. Plugging these values into the Taylor rule formula, we get a nominal interest rate of 3%.

Question 6

Assume the central bank announced a 2% inflation target and has set the nominal interest rate at 5.0%.If actual inflation is 2.8%, by how much is output off the full-employment level?

Accepted Answer

The answer of Assume the central bank announced a 2%...

Question 7

Assume the central bank's announced inflation target is 2%, output is 2% below the full-employment level, and the Taylor rule suggests that the central bank sets the nominal interest rate at 4.5%.What is most likely the current inflation rate?

Accepted Answer

According to the Taylor rule, the nominal interest rate is set by adding the target inflation rate to the difference between the actual inflation rate and the target rate, and adding the output gap multiplied by a coefficient (usually around 0.5). In this case, the output gap is -2%, so the nominal interest rate should be set at:

4.5% + (2% - 2%) + (-2% x 0.5) = 3%

Therefore, if the central bank is following the Taylor rule and aiming for the 2% inflation target while output is below full-employment levels, the current inflation rate is likely around 3.6%, which is above the target rate but within the typical range of acceptable inflation.

Question 8

If a central bank engages in inflation targeting, then

Accepted Answer

Inflation targeting means that the central bank focuses on keeping inflation at a specific target level. If inflation is above the target, the central bank will raise interest rates to slow down economic growth and reduce inflation. If inflation is below the target, the central bank will lower interest rates to stimulate economic growth and increase inflation. Therefore, the correct answer is A.

Question 9

In the Taylor rule, if the inflation coefficient ? is much larger than the output coefficient ?, then the central bank

Accepted Answer

The answer of In the Taylor rule, if the inflation...

Question 10

Assume a central bank announced a zero percent inflation target.If the current inflation rate is 2.4%, and output is at the full-employment level, at what level should the central bank set the nominal interest rate according to the Taylor rule?

Accepted Answer

The Taylor rule formula is: Nominal Interest Rate = Real Interest Rate + Current Inflation + 0.5(Inflation Gap) + 0.5(Output Gap). Assuming a real interest rate of 2% (a common assumption) and aiming for a 0% inflation target while the current inflation is 2.4% (inflation gap of 2.4%) and output is at full employment (output gap of 0%), the calculation is: Nominal Interest Rate = 2% + 2.4% + 0.5(2.4% - 0%) + 0.5(0%) = 2% + 2.4% + 1.2% = 5.6%, which rounds to approximately 6%.

Quiz 9: Policy preview