**ECO 320 Money & Banking Homework **

**ECO 320 Money & Banking Homework**

ECO 320 Money & Banking Homework

Week 10 Chapter 18

Numerical Exercise 11:

Suppose that the Fed’s inflation target is 2 percent, potential output growth is 3.5 percent, and velocity is a function of how much the interest rate differs from 5 percent:

%∆V = 0.5 x (i – 5)

Suppose that a model of the economy suggests that the real interest rate is determined by the equation:

r = 8.5 – %∆Y

where Y is the level of output, so %∆Y is the growth rate of output. Suppose that people expect the Fed to hit its inflation target.

A. Calculate the optimal money growth rate needed for the Fed to hit its inflation target in the long run.

B. In the short run, if output growth is just 2 percent for two years and the equation determining the real interest rate changes to r = 4.5 – %∆Y, what money growth rate should the Fed aim for to hit its inflation target in that period?

C. If the Fed instead maintained the money growth rate from part a, what is likely to happen to inflation?

D. Which policy do you think is better in the long short run? Which is better in the long run?

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**ECO 320 Money & Banking Homework**

ECO 320 Money & Banking Homework

Week 10 Chapter 18

Numerical Exercise 11:

Suppose that the Fed’s inflation target is 2 percent, potential output growth is 3.5 percent, and velocity is a function of how much the interest rate differs from 5 percent:

%∆V = 0.5 x (i – 5)

Suppose that a model of the economy suggests that the real interest rate is determined by the equation:

r = 8.5 – %∆Y

where Y is the level of output, so %∆Y is the growth rate of output. Suppose that people expect the Fed to hit its inflation target.

A. Calculate the optimal money growth rate needed for the Fed to hit its inflation target in the long run.

B. In the short run, if output growth is just 2 percent for two years and the equation determining the real interest rate changes to r = 4.5 – %∆Y, what money growth rate should the Fed aim for to hit its inflation target in that period?

C. If the Fed instead maintained the money growth rate from part a, what is likely to happen to inflation?

D. Which policy do you think is better in the long short run? Which is better in the long run?

Do you need a similar assignment done for you from scratch? We have qualified writers to help you. We assure you an A+ quality paper that is free from plagiarism. Order now for an Amazing Discount!Use Discount Code “Newclient” for a 15% Discount!NB: We do not resell papers. Upon ordering, we do an original paper exclusively for you.

ECO 320 Money & Banking Homework