9. In this question, we are going dig deeper into the Taylor Rule and it variants (modifications).Federal Reserve data from October 1, 2011:Potential GDP growth y* = 1.7%Actual GDP Growth yA= 2.0% Inflation PCE (actual inflation) πA= 2.6% Effective Federal funds Rate = .07%As Taylor assumed, we assume the equilibrium real rate of interest r* = 2% and the optimal inflation rate, the target inflation rate π* is also equal to 2%.The standard (original) Taylor rule formula: iffTR= r* + πA+ 0.5[πA- π*] + 0.5 [ yA- y*]Using the 'standard' Taylor rule from above and using the data provided, what is the federal funds rate implied by the 'standard' Taylor Rule?A) 2.04%B) 1.56%C) 3.33%D) 5.05%Correct Answer(s):D
Feedback: Data as of 4th quarter 2011Original Taylor Rule: iffTR= r* + πA+ 0.5[πA- π*] + 0.5 [ yA- y*]5.05 = 2 + 2.6 + .5[2.6 - 2] + .5[2.0 - 1.7]Table for Individual Question FeedbackPoints Earned: 4.0/4.0
10. According to the actual federal funds rate (use the Effective Federal Funds Rate provided abovefor 2011-10-01), is the Fed being hawkish or dovish?