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**E251 Intermediate Macroeconomics Problem Set 4 **

ORDER # | 100069 |

PAPER TYPE | MATH FOR ECONOMICS |

WRITING LEVEL | UNDERGRADUATE |

WRITING STYLE | APA |

# OF SOURCES | N/A |

# OF QUESTIONS | 4 |

**Problem Set 4 Part 2 Due Sunday, April 25 11pm EDT, US**

**Problem set #4 part 2 is worth 40 points for problem set #4 (point total for problem set 4 will sum the points for parts 1 and 2). Assignments to be handwritten then scanned into a single pdf (except for approved disabilities), which is to be sent to csteven4@oberlin.edu and jduca@oberlin.edu with a subject line of E251 Problem Set 4 Part 2. There is a 10-point penalty for an incorrectly named file. You are responsible for naming your pdf file as follows: E251_PS4P2_yourlastname_yourfirstname. For example, if your name were Janine Smith, your pdf file should be named: E251_PS4P2_Smith_Janine.**

**4. (40 points) Taylor Rule**

**4a. (8 points) Monetary Policy along an AD Curve Reflecting a Fixed Policy (Taylor) Rule. In this section assume that the central bank follows the following prescription for the nominal federal funds rate:**

**nominal federal funds (FF) rate = inflation + the equilibrium real federal funds + 1/2(output gap) + 1/2(inflation gap)**

**where the inflation target is 2 percent. Use this target to calculate the inflation gap.**

**Suppose inflation = 8%; the equilibrium real federal funds = 3%; the inflation target is 2%; and output = potential output. Calculate the following (8 points):**

**Inflation Gap ___ __ percent Output Gap __ ___ percent**

**Nominal FF Target Rate ___ __ percent Neutral Nominal FF Rate __ ___ percent**

**At the calculated nominal federal funds rate target (the one prescribed by the Taylor Rule), is the stance of monetary policy expansionary, contractionary, or neutral? Why? (2 points)**

**4b. (16 points) Monetary policy along an AD curve reflecting a fixed policy (Taylor) rule. Use the same Taylor Rule and inflation target as in 2a, now let the conditions change to:**

**Actual inflation = 0%; the equilibrium real federal funds = 3%; the inflation target were 2%; and output is 9 percent below potential output. Calculate the following (8 points):**

**Inflation Gap _ __ percent Output Gap _ ___ percent**

**Nominal FF Target Rate _ percent Neutral Nominal FF Rate ___ ___ percent**

**At the calculated nominal federal funds rate target (the one prescribed by the Taylor Rule), is the stance of monetary policy expansionary, contractionary, or neutral? Why? (4 points) Is there something unusual about the nominal FF Target in (2b) that would make it difficult for the central bank to enact the calculated FF Target (4 points)?**

**4c. (6 points) In this section assume that the central bank follows the following prescription for the nominal federal funds rate:**

**nominal federal funds (FF) rate = inflation + the equilibrium real federal funds + 1/2(output gap) + 1/2(inflation gap)**

**where the inflation target is now 4 percent. Use this target to calculate the inflation gap.**

**Suppose the economy starts from the following conditions:**

**Actual inflation = 6%; the equilibrium real federal funds = 3%; the inflation target were 4%; and output equals potential output. Calculate the following (4 points) and fill in:**

**Inflation Gap ___ ___ percent Output Gap ___ _ _ percent**

**Nominal FF Target Rate _ _ __ percent Neutral Nominal FF Rate ___ ___ percent**

**At the calculated nominal federal funds rate target, is the stance of monetary policy expansionary, contractionary, or neutral (1 point) Why? (1 point)**

**4d. Now suppose an IS shock lowers inflation to 4 percent and actual output by 9 percent so that the conditions change to:**

**Actual inflation = 4%; the equilibrium real federal funds = 3%; the inflation target is 4%; and output is 9 percent below potential output. Calculate the following (4 points):**

**Inflation Gap __ _ percent Output Gap __ percent**

**Nominal FF Target Rate ___ percent Neutral Nominal FF Rate ___ ___ percent**

**Why? (2 points) Is the nominal FF Target in (4d) more or less feasible for the central bank to enact than in (4b) (2 points)? If there were no differences in the costs of 5 versus 2 percent inflation in terms of the efficiency of the price system and long-run growth, which inflation target does the problem favor: 2 or 5 percent inflation (2 points)?**

**To get solutions for E251 Intermediate Macroeconomics Problem Set 4, please click on https://academicessayist.com/orders/ordernow**

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