8. The Federal Open Market Committee (FOMC) sets the target for the federal funds rate, the interest rate that banks charge each other for uncollateralized loans in the overnight market. This question tests your understanding of how FOMC policy is made and how it affects the economy in the context of the AS/AD model a. The Patient Protection and Affordable Care Act (PPACA) mandates that firms with 50 or more workers must provide health insurance to all full time workers or pay a per worker fine. This has drawn concern from business leaders in industries that employee low wage workers who would need to be covered, e.g. The Cheesecake Factory's CEO said that the law could be "very costly and would have to pass these costs on to consumers." In the context of the AS/AD model and assuming that we are starting from a long-run equilibrium, clearly illustrate what would the short-run effects of PPACA be? (Hint: Shift the SRAS) b. If monetary policy did not respond to the PPACA, what would be the long run impact on the price level and output? Be sure to carefully describe how and what would adjust in the long run. c. Fast forward to the end of 2015. The change in the economic environment has left portfolio managers to wondering if and how the Fed will react. Turning to the data, we see that annual core PCE inflation has risen to 3%, while the Congressional Budget Office estimates that current real GDP is 4 percentage points below potential GDP. Use the Taylor rule to predict what the federal funds target rate will be. Assume the Fed's inflation target is 2%, the long run real interest rate is 2% and the sensitivity parameters (or coefficients) for deviations of inflation from its target and for deviations of output from its potential are both 0.5