Write out the expression for the Taylor rule. Use the Taylor rule ...

[bobthebuilder]

Write out the expression for the Taylor rule. Use the Taylor rule to explain how a decline in real GDP below potential GDP will affect the Federal Reserve's target for the federal funds rate.
 
  What will be an ideal response?

Question 2

Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be
 
  A) 19 percent. B) 15 percent. C) 11 percent. D) 6 percent.

[frankwu0507]

Answer to Question 1

The Taylor rule states that the Fed should set the federal funds target so that it is equal to: the real equilibrium federal funds rate + the current inflation rate + (w1 )  inflation gap + (w2 )  output gap. The inflation gap is the difference between the current inflation rate and the target rate. The output gap is the percentage difference between real GDP and potential GDP. The values w1 and w2 are weights determined by the Fed. If the growth rate in real GDP is below potential GDP, then the output gap will be negative. This will lower the federal funds target.

Answer to Question 2

C