Suppose that the economy responds to the real interest rate according to the following equation:
Yt = Y* - Y* (1.5) (i(t-1) - 0.025)
Potential GDP is $25 trillion; expectations are adaptive; the natural rate of unemployment is 5.5%; the 2010 inflation rate was 3.5%. The phillips curve is:
πt = πte + 0.75 (Y(t-1) - Y*)/Y*
Suppose the unemployment rate in 2011 was 7.1%. What is GDP in 2011 (show your answer in trillions to two decimal places. i.e. if your answer is one trillion five hundred fifty million, then you enter "1.55")?
Suppose output in 2010 is 27.4. Calculate the inflation rate in 2011?
Suppose that the policy interest rate is 1.2. What will the 2012 Output be?
What will the 2012 and 2013 inflation rates be?
If the federal reserve wants to bring inflation to 2% in 2014 what will output need to be in 2013?
The fed wants inflation to be 2% in 2013. In question 45 you calculated the 2013 output level to get there. Now calculate the 2012 interest rate necessary to achieve that?