Homework 6 Part 2 - 11 Now consider the modified version of...

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11.Now consider the modified version of the Taylor using the unemployment gap instead of the GDP gap just like we did in the lectures. Also, we will use the PCE core rate of inflation instead of overall inflation like you used above - the Fed arguably cares more about core inflation than overall inflation.Modified Taylor Rule formula:iffTR = r* + πA+ 0.5[πA- π*] + (-1.25) [URA- NAIRU]Additional needed data from Federal Reserve data from October 1, 2011:Unemployment Rate URA= 8.7%NAIRU = 5.5%Inflation PCE Core (actual inflation) πA= 1.8%Now what is the federal funds rate implied by the modified Taylor Rule above?A) -.45B) -.30C) 0.45D) 0.30Feedback:-.3 = 2 + 1.8 + 0.5[1.8 - 2] + (-1.25) [8.7 - 5.5]Correct Answer(s):B
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12.According to the actual federal funds rate, is the Fed being hawkish or dovish?

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