Problem Set 5 Assignment

Problem Set 5 Assignment - period (more expansionary than...

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Economics 330 – Money and Banking Fall 2010 Dr. John Neri Problem Set 5 – Due within the first five minutes of lecture on Monday November 29, 2010. Late submissions will not be accepted under any circumstance. You must show your calculations. 1. The data below shows the monthly rate of inflation, the output gap and the Actual Target federal funds rate set by the FOMC for the 22 month period from June 2004 through March 2006. A. Use this information to calculate for each month the federal funds rate implied by the Taylor Rule equation where the Fed’s target real federal funds rate is 2% and the target inflation rate is 2%. The weights on the inflation and output gaps are 0.5, respectively. You must show your calculations. This is easy to do in Excel. B. Compare the implied federal funds rates calculated in part (A) to the Fed’s actual target federal funds rates in each month. How would you describe the Fed's monetary policy stance over this time
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Unformatted text preview: period (more expansionary than implied, neutral, or less expansionary than implied)? Draw a graph and turn in the graph!!!!!! Date Inflation Rate(%) Output Gap(%) Target FFR(%) 2004-06-01 1.85 -0.5 1.00 2004-07-01 1.74 -0.4 1.25 2004-08-01 1.74 -0.3 1.50 2004-09-01 1.99 -0.3 1.50 2004-10-01 1.99 -0.3 1.75 2004-11-01 2.19 -0.2 2.00 2004-12-01 2.19 -0.2 2.25 2005-01-01 2.24 0.0 2.25 2005-02-01 2.33 -0.2 2.50 2005-03-01 2.33 0.1 2.75 2005-04-01 2.17 0.2 2.75 2005-05-01 2.17 0.2 3.00 2005-06-01 2.01 0.3 3.00 2005-07-01 2.11 0.3 3.25 2005-08-01 2.11 0.4 3.50 2005-09-01 1.95 0.2 3.50 2005-10-01 2.05 0.5 3.75 2005-11-01 2.10 0.4 4.00 2005-12-01 2.14 0.5 4.25 2006-01-01 2.09 0.7 4.25 2006-02-01 2.04 0.6 4.50 2006-03-01 2.08 0.7 4.50 C. Suppose the economy slipped into a severe recession and by March 2007 inflation was -2.0% and the output gap was -2. Would the Fed have difficulty implementing Taylor Rule in March 2007?...
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