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Question
Suppose (real) output is thought to be 2 percent above potential with an inflation rate of 3a. percent over the past year. The weights on the output gap and inflation gap are each 1/2. The inflation target is 1 percent. If you are sure that the equilibrium real federal funds rate is 3 percent, what is the Fed's setting for the federal funds rate, according to the Taylor rule?
b. If you are sure that the equilibrium real federal funds rate is 2 percent, what is the Fed's setting for the federal funds rate, according to the Taylor rule?
Answer
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