FF the federal funds rate PCE INF PCE inflation PCE CORE the core rate of PCE inflation GDP real GDP GDP POT potential GDP UR the unemployment rate DATES FF PCE INF PCE CORE GDP GDP POT UR 1974 04 01 11 25 10 0 7 1 5425 4 5404 6 5 2 1974 07 01 12 09 11 0 8 7 5372 8 5455 0 5 6 1974 10 01 9 35 11 5 9 9 5351 4 5505 2 6 6 1975 01 01 6 30 10 3 10 1 5286 7 5554 2 8 3 1975 04 01 5 42 8 6 9 1 5327 4 5601 5 8 9 1975 07 01 6 16 7 8 7 7 5415 5 5648 2 8 5 1975 10 01 5 41 6 8 6 8 5488 5 5694 4 8 3 1976 01 01 4 83 6 0 6 3 5612 4 5739 8 7 7 1976 04 01 5 20 5 6 6 0 5654 8 5784 9 7 6 1976 07 01 5 28 5 2 6 0 5683 6 5830 4 7 7 1976 10 01 4 87 5 1 6 0 5726 2 5876 9 7 8 1977 01 01 4 66 5 8 6 1 5792 9 5925 7 7 5 1977 04 01 5 16 6 8 6 5 5906 6 5976 7 7 1 1977 07 01 5 82 6 8 6 6 6011 1 6029 3 6 9 1977 10 01 6 51 6 6 6 5 6011 7 6083 6 6 7 1978 01 01 6 76 6 5 6 4 6032 6 6140 0 6 3 1978 04 01 7 28 6 8 6 6 6267 2 6199 7 6 0 1978 07 01 8 10 7 1 6 7 6328 5 6259 8 6 0 1978 10 01 9 58 7 6 7 0 6413 3 6319 5 5 9 1979 01 01 10 07 7 8 6 8 6426 1 6377 2 5 9 We are using data from 1976 10 01 to answer this question a) (5 points) Using the original Taylor Rule where the equilibrium real rate of interest is estimated to be 2 and the target inflation rate is 2 , what is the federal funds rate implied by the Taylor Rule b) (5 points) Using the Mankiw Rule, what is the federal funds rate implied by the Mankiw Rule c) (5 points) According to the Taylor Rule, was the Fed being hawkish or dovish during this period Explain and be specific with numbers d) (10 points) Relate your answer in part c) to the work done by Kydland and Prescott e) (10 points) Draw a reserve market diagram (reserve supply and reserve demand) locating the point associated with the actual federal funds rate on 1976 10 01 as point A We don't know what value reserve supply is so just label as R S Now assuming a stable reserve demand curve, explain and show what the Fed would have had to do to obtain the federal funds rate implied by the Taylor rule Label this point as point B

Question

FF   the federal funds rate PCE INF   PCE inflation PCE CORE   the core rate of PCE inflation GDP   real GDP GDP POT   potential GDP UR   the unemployment rate DATES FF PCE INF PCE CORE GDP GDP POT UR 1974 04 01 11 25 10 0 7 1 5425 4 5404 6 5 2 1974 07 01 12 09 11 0 8 7 5372 8 5455 0 5 6 1974 10 01 9 35 11 5 9 9 5351 4 5505 2 6 6 1975 01 01 6 30 10 3 10 1 5286 7 5554 2 8 3 1975 04 01 5 42 8 6 9 1 5327 4 5601 5 8 9 1975 07 01 6 16 7 8 7 7 5415 5 5648 2 8 5 1975 10 01 5 41 6 8 6 8 5488 5 5694 4 8 3 1976 01 01 4 83 6 0 6 3 5612 4 5739 8 7 7 1976 04 01 5 20 5 6 6 0 5654 8 5784 9 7 6 1976 07 01 5 28 5 2 6 0 5683 6 5830 4 7 7 1976 10 01 4 87 5 1 6 0 5726 2 5876 9 7 8 1977 01 01 4 66 5 8 6 1 5792 9 5925 7 7 5 1977 04 01 5 16 6 8 6 5 5906 6 5976 7 7 1 1977 07 01 5 82 6 8 6 6 6011 1 6029 3 6 9 1977 10 01 6 51 6 6 6 5 6011 7 6083 6 6 7 1978 01 01 6 76 6 5 6 4 6032 6 6140 0 6 3 1978 04 01 7 28 6 8 6 6 6267 2 6199 7 6 0 1978 07 01 8 10 7 1 6 7 6328 5 6259 8 6 0 1978 10 01 9 58 7 6 7 0 6413 3 6319 5 5 9 1979 01 01 10 07 7 8 6 8 6426 1 6377 2 5 9 We are using data from 1976 10 01 to answer this question  a) (5 points) Using the original Taylor Rule where the equilibrium real rate of interest is estimated to be 2  and the target inflation rate is 2 , what is the federal funds rate implied by the Taylor Rule  b) (5 points) Using the Mankiw Rule, what is the federal funds rate implied by the Mankiw Rule  c) (5 points) According to the Taylor Rule, was the Fed being hawkish or dovish during this period  Explain and be specific with numbers  d) (10 points) Relate your answer in part c) to the work done by Kydland and Prescott  e) (10 points) Draw a reserve market diagram (reserve supply and reserve demand) locating the point associated with the actual federal funds rate on 1976 10 01 as point A  We don't know what value reserve supply is so just label as R S   Now assuming a stable reserve demand curve, explain and show what the Fed would have had to do to obtain the federal funds rate implied by the Taylor rule  Label this point as point B

Accepted Answer

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DATES	FF	PCE INF	PCE CORE	GDP	GDP POT	UR
1974-04-01	11.25	10.0	7.1	5425.4	5404.6	5.2
1974-07-01	12.09	11.0	8.7	5372.8	5455.0	5.6
1974-10-01	9.35	11.5	9.9	5351.4	5505.2	6.6
1975-01-01	6.30	10.3	10.1	5286.7	5554.2	8.3
1975-04-01	5.42	8.6	9.1	5327.4	5601.5	8.9
1975-07-01	6.16	7.8	7.7	5415.5	5648.2	8.5
1975-10-01	5.41	6.8	6.8	5488.5	5694.4	8.3
1976-01-01	4.83	6.0	6.3	5612.4	5739.8	7.7
1976-04-01	5.20	5.6	6.0	5654.8	5784.9	7.6
1976-07-01	5.28	5.2	6.0	5683.6	5830.4	7.7
1976-10-01	4.87	5.1	6.0	5726.2	5876.9	7.8
1977-01-01	4.66	5.8	6.1	5792.9	5925.7	7.5
1977-04-01	5.16	6.8	6.5	5906.6	5976.7	7.1
1977-07-01	5.82	6.8	6.6	6011.1	6029.3	6.9
1977-10-01	6.51	6.6	6.5	6011.7	6083.6	6.7
1978-01-01	6.76	6.5	6.4	6032.6	6140.0	6.3
1978-04-01	7.28	6.8	6.6	6267.2	6199.7	6.0
1978-07-01	8.10	7.1	6.7	6328.5	6259.8	6.0
1978-10-01	9.58	7.6	7.0	6413.3	6319.5	5.9
1979-01-01	10.07	7.8	6.8	6426.1	6377.2	5.9

Question

FF - the federal funds rate PCE INF = PCE inflation PCE CORE = the core rate of PCE inflation GDP = real GDP GDP

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