5 and the weight on unemployment is 1 10 points a

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Financial Markets & Institutions
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Chapter 5 / Exercise 19
Financial Markets & Institutions
Madura
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target = 2% and the weight in the Taylor Rule on excess inflation is 1.5 and the weight on unemployment is 1. [10 points]a.What is the Taylor Rule? Define all the variables.b.What is the Fed’s target interest rate if current U = 9% and current π = 1%c.What is i* if current U = 4% and current π = 8%5.Suppose an economy has a Phillips curve π = π-10.5(U – 0.05)[20 points]a.What is the natural rate of unemployment U*?b.Graph the short run and long run relationships between inflation and unemployment.c.Suppose current inflation is 7% and target inflation is 2%. How much cyclical unemployment is necessary to reduce inflation by 5 percentage points? d.What is Okun’s law?e.According to Okun’s Law, how much GDP will be lost by reducing inflation by 5%? 6.The Fed now targets inflation and unemployment in setting monetary policy. Should it also target asset bubbles in the stock market and real estate? Explain what the issue is. Give arguments for and against. [10 points]7.How did the actions of various actors contribute to the 2008 financial crisis? [15 points]8.How did the bursting of the real estate bubble and the financial crisis in 2008 affect aggregatedemand and its components? [15 points]
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Financial Markets & Institutions
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Chapter 5 / Exercise 19
Financial Markets & Institutions
Madura
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