SOLVED

21) Since 2000, the Fed uses ________ to measure inflation. A) the index of leading economic indicators B) the personal consumption expenditures index C) the consumer price index D) the GDP deflator E) the producer price index 22) The Fed uses a “core” price index, one that excludes food and energy prices to measure inflation. It does so because A) food and energy are inelastic goods and consumers will buy them regardless of their price. B) it wants to avoid the blame for high gasoline prices causing inflation. C) food and energy prices have wide swings that are not related to the causes of general inflation. D) food and energy prices do not change all that much during the short run, so are irrelevant to the calculation of inflation. 23) The relationship between GDP and the money supply has gotten stronger since the 1980s. 24) The Fed has adopted an interest rate target for most of the time since World War II. 25) The Federal Reserve’s performance in the mid-to-late 1980s, 1990s, and early 2000s has received high marks from economists, even without inflation targeting. 26) Using the money demand and money supply model, show and explain why the Federal Reserve cannot achieve a target for both the money supply and an interest rate. 27) Consider the Taylor rule for the target of the federal funds rate. Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 3 percent, the current inflation rate is 3 percent, real GDP equals potential real GDP, and the weights are 1/2 for the inflation gap and the output gap. Using the Taylor rule, what does the target for the federal funds rate equal? Next, if the Federal Reserve lowered the target for the inflation rate to 1 percent, how much would the target for the federal funds rate change? 28) In the Taylor rule, does the target for the federal funds rate respond differently for a recession caused by a decrease in aggregate demand and for a recession caused by a decrease in short-run aggregate supply? Explain whether there is or is not a difference in how the target for the federal funds rate changes. 29) According to the Taylor rule, does the target for the federal funds rate respond differently for an increase in inflation caused by an increase in aggregate demand and for an increase in inflation caused by a decrease in short-run aggregate supply? Explain whether there is or is not a difference in how the target for the federal funds rate changes.