Problem
In the Humphrey Hawkins Full Employment and Balanced Growth Act of 1978, the Federal Reserve is charged with pursuing the three goals of stable prices, maximum employment and moderate long-term interest rates. The latter of the three objectives is rarely mentioned in monetary policy discussions. Rather, it is the "dual mandate" of maximum employment and price stability that is emphasized. Because of Federal Reserve Board and Open Market Committee actions after the passage of the 1978 Act, the Taylor Rule (Model) is used to assess Federal Reserve actions.
a. Show the Taylor Rule equation and then discuss its characteristics including any assumptions that are being made. In your discussion, indicate how variables in the equation influence the federal funds interest rate and how the variables will bring about an expansionary monetary policy or a contractionary monetary policy. The two key variables are the output (GDP) GAP and the inflation GAP.
b. Then discuss how well the Taylor Rule works for assessing monetary policy taking account of historical evidence and the most recent financial crisis.
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.