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Based on the Taylor Rule use the following information to calculate the target federal funds rate.
Variable Value Target inflation rate: 2 percent
Current inflation rate :10 percent
Real equilibrium federal funds rate :2 percent
Output gap: 8 percent

Question: In this​ case, the Federal funds target rate​ is: ​(Round your solution to one decimal​ place.)

Respuesta :

meerkat18

Based on the Taylor Rule, the formula for calculating the Federal target rate is:

Federal funds rate target = equilibrium real federal funds rate + inflation rate + 1/2(output gap) + 1/2(inflation gap) 

We are given that:

equilibrium real federal funds rate = 2%

inflation rate = 10%

output gap = 8%

inflation gap = 10% - 2% = 8%

Substituting to the equation:

Federal funds rate target = 2% + 10% + 0.5*8% + 0.5*8%

Federal funds rate target = 20%

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