Suppose the Fed targets for an inflation of 2%. She projects an economic growth rate
of 3%. The current real interest rate is 4%.
A) Suggest the long-run money supply growth rate for the Fed. Briefly explain
your answer. State the necessary assumption in your analysis.
B) What should be the corresponding targeted federal fund rate? Briefly explain
your answer.
C) If the current market federal fund rate is 4%, how can the Fed achieve the
corresponding target federal fund rate in part b) through the open market
operation? Explain.
