Question

Suppose that the equilibrium real federal funds rate is 4% and the target rate of inflation is 1%. Use the following information and the Taylor rule to calculate the federal funds rate​ target:
Current inflation rate​ = 4%
Potential real GDP​ = ​$14.72 trillion
Real GDP​ = ​$14.81 trillion
The federal funds target rate is____​%.​

Answer 1

Answer: 9.81%

Explanation:

The formula to find the Federal funds target rate is:

= Current inflation + Equilibrium federal funds rate + (0.5 * (Current inflation -  Target inflation rate)) + (0.5 * Output gap)

Output gap:

= (Real GDP - Potential GDP) / Potential GDP

= (14.81 - 14.72) / 14.72

= 0.611%

Federal funds target rate is:

= 4% + 4% + (0.5 * (4% - 1%)) + (0.5 * 0.611%)

= 9.8055%

= 9.81%