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Problem Set 4.pptx

Problem Set 4.pptx - Problem Set 4 Jack Limongelli Question...

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Problem Set 4 Jack Limongelli
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Question 1 Part A 0.0 5.0 10.0 15.0 20.0 InterestLevel Taylor Rule Federal Funds Rate
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Part A Explanation For the majority of the time frame, the Taylor Rule generally matches the trends of the actual federal funds rate. With that said, the federal funds rate has largely remained higher than the recommended rate from the Taylor Rule. There are two deviations in the graph: the mid to late 1970s and the few years after the 2008 crash. In 2010, the Taylor Rule suggested a negative interest rate, which would essentially force banks to lend their cash. In the 1970’s, following the oil crisis and a very large bear market the Fed dropped interest rates, attempting to maintain employment while allowing for relatively high inflation.
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Part B Faced with weakening economic circumstances, chiefly the oil crisis and a strong bear market, the FED dropped the interest rate (from about 12% in 1973 to nearly 4.8% in 1974). The goal was to maintain maximum employment. However, due to the
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