Consider the Taylor Rule for the Target of the Federal

question 50

Essay

Consider the Taylor rule for the target of the federal funds rate.Suppose the equilibrium real federal funds rate is 2 percent,the target rate of inflation is 3 percent,the current inflation rate is 3 percent,real GDP equals potential real GDP,and the weights are 1/2 for the inflation gap and the output gap.Using the Taylor rule,what does the target for the federal funds rate equal? Next,if the Federal Reserve lowered the target for the inflation rate to 1 percent,how much would the target for the federal funds rate change?

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Definitions:

Conservation

Understanding that certain properties of physical objects remain the same even when their outward appearance changes.

Concrete Operational Stage

A stage in Piaget's theory of cognitive development where children between ages 7 and 11 develop logical thinking but are not yet capable of abstract thought.

Cognitive Development

The process through which a person's thinking and reasoning abilities evolve and mature over time, often studied in the context of child development.

Hypothetical Thinking

The ability to consider multiple possibilities and outcomes of situations that are not necessarily rooted in current reality.