The Taylor rule helps explain the relationship between the Fed's ...

[casperchen82]

The Taylor rule helps explain the relationship between the Fed's ________ and ________.
 
  A) federal funds target; the monetary growth rule B) federal funds target; economic conditions
  C) money supply target; the federal funds target D) money supply target; economic conditions

Question 2

If expectations are adaptive, how will the economy adjust to a new long-run equilibrium in response to contractionary monetary policy? Support your answer with a graph of the Phillips curve.
 
  What will be an ideal response?

[shailee]

Answer to Question 1

B

Answer to Question 2

Contractionary monetary policy reduces the inflation rate. With adaptive expectations, workers and firms will overestimate inflation, resulting in an increase in the real wage and an increase in the unemployment rate (move from A to B on the short-run Phillips curve below). Eventually, workers and firms will adjust to the fact that inflation is lower, shifting the short-run Phillips curve down and reducing the unemployment rate to its natural rate (move from B to C in the graph below).

[casperchen82]

Wow, this really help

[amit]

Excellent