Question 18 1 pts Olivier Blanchard, the French economist and the previous chief economist at the International Monetary Fund (IMF), believes that the target inflation rate should be higher than 2 percent. He proposes 4 percent, rather than Taylor's 2 percent. According to Blanchard, this provides more flexibility for the Fed to fight severe recessions. Let's see what he means using our Taylor Rule. First, let's assume that the target inflation rate in 2 percent as before. Let's suppose that because of the Fed's successful policy, the actual inflation rate is also 2 percent, equal to the target. Now assume the following: Current Actual Inflation Rate = 2% Potential Real GDP = 100,000 Actual Real GDP = 90,000 (we have a 10% GDP gap, which is horrible!) According to the Taylor Rule (with the 2% target inflation rate), the Fed should set the federal funds rate at percent (just write down the federal funds rate that comes out of the formula). In that case, the real federal funds rate will equal percent. Ask yourself: Is this scenario possible? Next, let's assume that the target inflation rate in 4 percent as proposed by Blanchard. Let's suppose that because of the Fed's successful policy, the actual inflation rate is also 4 percent, equal to the target. Now assume the following: Current Actual Inflation Rate = 4% Potential Real GDP = 100,000 Actual Real GDP = 90,000 (we have a severe recession, as before!) According to the Taylor Rule (with the 4% target inflation rate), the Fed should set the federal funds rate at percent. In that case, the real federal funds rate will equal percent. Ask yourself: Is this scenario possible?Question 1 1pts Suppose we have the following banking data (in $billion): C = $300 Currency in circulation D = $2,000 Demand deposits rr = 0.10 Required reserve ratio ER = $1,340 Excess reserves in the banking system There are no other types of deposits in the banking system. Calculate for us the following: Currency-deposit ratio (c) = ' 0-15 ' Excess-Reserves-deposit ratio (er) = 0-'57 ' Money supply = ' 2300-00 ' $billion Monetary base =' 1340-00 'Sbbillion Money multiplier (m) = 1-25 ' Question 3 1 pts Suppose that the currency deposit ratio (c) and the required reserve ratio (rr) are the same as in Question 1. However, the excess reserve ratio equals er = 2.05. So, currently the money multiplier is . If, all else the same, the currency deposit ratio increases to c = 0.38, the new money multiplier will equal Can you explain why the results for this question and the previous one are different? Think about the economic reason. Who knows, you might be asked this on the nal exam