Welcome to Scribd, the world's digital library. Read, publish, and share books and documents. See more ➡
Standard view
Full view
of .
×
0 of .
Results for:
P. 1
targeted inflation rate, NIR, RIR

# targeted inflation rate, NIR, RIR

Ratings: 0|Views: 69|Likes:
inflation rate
inflation rate

Categories:Types, School Work

### Availability:

See More
See less

05/23/2013

pdf

text

original

Norman

1. Assume that the U.S economy is in long-run equilibrium with an expected inflationrate of 6% and an unemployment rate of 5%. The nominal interest rate is 8%.
(a) Using a correctly labeled graph with both the short-run and long-run Phillips curves
and the
relevant numbers from above, show the current long-run equilibrium as point A.(b) Calculate the real interest rate in the long-run equilibrium.
SRPC
I  n   f   l  a   t   i  o  n
6
%Unemployment
5%
LRPCA
Answer to 1. (b)The real interest rate = the nominal interest rate
–
anticipated (expected) inflation.NIR [8%] - expected inflation [6%] = RIR [2%]

(c) Assume now that the Federal Reserve decides to target an inflation rate of 3%.What open-market operation should the Federal Reserve undertake?(d) Using a correctly labeled graph of the money market, show how the Federal
Reserve’s action you identified in part c will affect the nominal interest rate.

The open market operation to decrease inflation from 6% to 3% wouldbe for the Fed to sell bonds to the banks.Answer to 1. (d)
The Fed’s selling of bonds would decrease MS from MS1 to MS2 and
increase nominal interest rates.
Money Market

ir1
0
D
m

MS
2
MS
1
N  o  m   i  n  a   l   I  n   t  e  r  e  s   t   R  a   t  e
ir2
[Sell bonds]

## Activity (1)

### Showing

AllMost RecentReviewsAll NotesLikes