Answer:
9.81%
Explanation:
Data provided in the question:
Equilibrium real federal funds rate = 4%
The target rate of inflation = 1%
Current inflation rate = 4 percent
Potential real GDP = $14.72 trillion
Real GDP = $14.81 trillion
Now,
Output gap
= [ Real GDP - Potential GDP ] ÷ Potential GDP
= ( $14.81 - $14.72 ) ÷ $14.72
= 0.09 ÷ 14.72
= 0.0061 or 0.61%
Target Federal Funds Rate
= Current Inflation rate + Equilibrium real FFR + 0.5 × (Current inflation rate - Target inflation rate) + 0.5 × Output gap
= 4% + 4% + [ 0.5 × (4% - 1%) ] + [ 0.5 x 0.61% ]
= 8% + [ 0.5 × 3% ] + 0.31%
= 8.31% + 1.5%
= 9.81%
