Suppose That the Equilibrium Real Interest Rate Is 2 Percent

question 82

Multiple Choice

Suppose that the equilibrium real interest rate is 2 percent per year, inflation is 2.5 percent and the output gap is 1 percent. Using the Taylor rule, what is the federal funds rate?

• A) 3 percent
• B) 3.5 percent
• C) 5.25 percent
• D) 5.5 percent

Understand the basic emotions and their identification.

Recognize the impact of economic and material conditions on emotional well-being.

Understand the concept and implications of the endowment effect in economic behavior.

Recognize various cognitive biases and their impact on decision-making, including status quo bias, framing effect, and anchoring effect.

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Definitions:

Cost of Equity

The rate of return that a company needs to generate in order to compensate its equity investors, taking into account the risk associated with the investment.

Market Risk Premium

Market risk premium is the expected return on an investment over the risk-free rate, representing the compensation investors require for taking on higher risk.

Dividends

Funds distributed by a company to its shareholders, typically sourced from the firm's earnings.

Weighted Average Cost of Capital

A calculation of a firm's cost of capital in which each category of capital is proportionately weighted, reflecting the expected cost of new capital funding.