What does the Taylor rule imply that policymakers should do to the fed funds rate under the following scenarios?

  • 1. Prompt: What does the Taylor rule imply that policymakers should do to the fed funds rate under the following scenarios?
  • Requirements: Please apply the question above to each of the following scenarios.
  1. Unemployment rises due to a recession.
  2. An oil price shock causes the inflation rate to rise by 1% and output to fall by 1%.
  3. The economy experiences prolonged increases in productivity growth, while actual output growth is unchanged.
  4. Potential output declines while actual output remains unchanged.
  5. The Fed revises its (implicit) inflation target downward.
  6. The equilibrium real fed funds rate decreases.
  1. References: the Economics of Money, Banking, and Financial Markets text
    • Part 5: International Finance and Monetary Policy Introduction
    • Part 5.20: The Foreign Exchange Market
    • Part 5.21: The International Financial System
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