Question
Use the following Taylor rule to calculate what would happen to the real interest rate if inflation increased by 1 percentage points. Target federal funds
Use the following Taylor rule to calculate what would happen to the real interest rate if inflation increased by 1 percentage points.
Target federal funds rate = 2 + Current inflation + 1/2 (Inflation gap) + 1/2(Output gap)
If inflation goes up by 1 percentage points, the target federal funds rate goes up by ___ percentage points ( ___ percentage points due to the direct impact of inflation and another __ percentage points due to an increase in the inflation gap). According to the Fisher equation, if the nominal rate increased by __ percentage points and inflation increased by ___ percentage points, the real interest rate must have increased by ___ percentage points.
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