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20 January, 07:58

Based on the Taylor Rule use the following information to calculate the target federal funds rate. Variable Value Target inflation rate 2 percent Current inflation rate 4 percent Real equilibrium federal funds rate 2 percent Output gap 8 percent In this case, the Federal funds target rate is: nothing percent. (Round your solution to one decimal place.)

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  1. 20 January, 11:18
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    Target funds rate = 7.5%

    Explanation:

    The target Federal funds rate is calculated as:

    Target funds rate = Real equilibrium Federal funds rate + current inflation + 0.5 (inflation gap) + 0.5 (output gap).

    (Inflation gap = Current inflation rate - Target inflation rate)

    So, Target funds rate = 2 + 1 + 0.5 (1 - 2) + 0.5 (10)

    = 3 + 0.5 (-1) + 5

    = 3 - 0.5 + 5

    = 7.5

    Therefore, Target funds rate = 7.5%
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