# Jull Maroc Telecom 1 74 1315 Hier 2139 Modifier Question 6 [2 mark.docx

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Jull Maroc Telecom 1 74% 13:15 Hier 21:39 Modifier Question 6 [2 marks] The European Central Bank normally sets monetary policy by choosing 1 year real interest rates according to the following Taylor Rule 1-F+%67"-7)+% After the Global Financial Crisis, the output gap was - 3% and the expected inflation rate and the annual inflation rate were both 0% What value should the Central bank set real and nominal interest rates if the European Central bank is it follows the Taylor Rule? Why may this not be possible? If the central bank cannot set them as low as it wants, what happens to their ability to achieve their desired inflation and output targets? ECON 2302 Te Test an Andrew Coleman November 2015 Please write the answers at the top Question mark A negatively sloped ved curve y means (a) the inflation rate is low (b) the nation rate is high the inflation rate is decrease d) the inflation rate is increasing el real interest rates are

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Unformatted text preview: increasing Question 2 [1 mark] If one year maturity interest rates are 4 percent, and two year maturity interes percent, one year interest rates are expected to (a) fall by 2 percent over the next year. [b] Fall by 1 percent over the next year (c) be unchanged over the next year. d) ise by 1 percent over the next year (e) rise by 2 percent over the next year. Question 3 [1 mark] if nominal interest rates are 2 percent and the real interest rate (a) nominal interest rates are expected to fall (b) nominal interest rates are expected to increase (c) prices are falling W prices are increasing (e) real interest rates are expected to fall (1) real interest rates are expected to increase Question 4 (imark] At time t, 1 year, 2 year, and 3 year interest rates are 6% 7%, and respectively. Assuming expectations are forward looking and rational, what is the expected valur 2 year interest rates att1? (a) 6% (b) 7% (CL83 ( 9% (e) 10%...
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