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The Taylor Rule puts _________ as much weight on closing the unemployment gap as it does on closing the inflation gap.

a. just

b. twice

c. half

d. ten times

Short Answer

Expert verified

The correct option is ‘b.twice’.

Step by step solution

01

Step 1. Reason for the correct option 

The closing gap is twice as high in the case of unemployment as in inflation. The Taylor rule uses 0.5 as the coefficient for inflation and 1.0 as the coefficient for unemployment. Therefore, we can conclude that the Taylor rule gives twice as much weight to close the unemployment gap than closing the inflation gap.

02

Step 2. Reasons for the incorrect options

a. This option is incorrect because it cannot be kept as just or equal as unemployment, and inflation faces an inverse trade-off. Therefore, a margin needs to be kept.

c. This is incorrect because unemployment is given more weight than inflation.

b. This is incorrect because if unemployment is given ten times more weight than inflation, it will miserably disturb the economic stability as these two variables are related indirectly. Therefore, a balance needs to be maintained.

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Most popular questions from this chapter

What is the basic determinant of (a) the transactions demand and (b) the asset demand for money? Explain how to combine these two demands graphically to determine total money demand. How is the equilibrium interest rate in the money market determined? Use a graph to show how an increase in the total demand for money affects the equilibrium interest rate (no change in the money supply). Use your general knowledge of equilibrium prices to explain why the previous interest rate is no longer sustainable.

Use commercial bank and Federal Reserve Bank balance sheets to demonstrate the effect of each of the following transactions on commercial bank reserves:

a. Federal Reserve Banks purchase securities from banks.

b. Commercial banks borrow from Federal Reserve Banks at the discount rate.

c. The Fed reduces the reserve ratio.

d. Commercial banks increase their reserves after the Fed increases the interest rate that it pays on reserves.

A bank currently has \(100,000 in checkable deposits and \)15,000 in actual reserves. If the reserve ratio is 20 percent, the bank has ______ in money-creating potential. If the reserve ratio is 14 percent, the bank has _______ in money-creating potential

a. \(20,000; \)14,000

b. \(3,000; \)2,100

c. −\(5,000; \)1,000

d. \(5,000; \)1,000

Define Monetary Policy?

Refer to the table for Moola below to answer the following questions. What is the equilibrium interest rate in Moola? What is the level of investment at the equilibrium interest rate? Is there either a recessionary output gap (negative GDP gap) or an inflationary output gap (positive GDP gap) at the equilibrium interest rate, and, if either, what is the amount? Given money demand, by how much would the Moola central bank need to change the money supply to close the output gap? What is the expenditure multiplier in Moola?

Money Supply (\()

Money Demand (\))

Interest Rate (%)

Investment at Interest Rate Shown (\()

Potential Real GDP (\))

Actual Real GDP at Interest

(Rate Shown) ($)

500

500

500

500

500

800

700

600

500

400

2

3

4

5

6

50

40

30

20

10

350

350

350

350

350

390

370

350

330

310

See all solutions

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