# ECON-002 Lecture Notes - Lecture 21: Federal Funds Rate, Real Interest Rate, Potential Output

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5 Jun 2017

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April 11th, 2017

The Employment Situation for March 2017:

u3 = 4.5% (know this for exam, but for the month of April)

-part-time economic reasons (PTER) workers: decreased 151,000

-marginally-attached workers: fell by 128,000

-LFPR steady at 63%

-ratio of employment/population nudges upwards by 0.1 percentage point

-this means that the decline in employment is actually good news

-CES Jobs = 98,000?

Monetary Rule:

Defined: how Fed reacts to inflation and to other macro changes

In an equation:

y = mx + b

R = z + 0.5*pi

z is the intercept of the graph

Taylor’s Rule:

Nominal federal funds rate (F) =

Long-run real interest rate (R*) - 0.5*target inflation rate (π*) + 0.5*GDP GAP

+ 1.5*Inflation Rate (π)

F = R* - π* + 0.5 GAP + 1.5π

R*: Spending Allocation Model

π*: inflation target (preferences of Fed)

1. Cushion against deflation: R=Nominal interest rate - π

-Negative π raises R

2. Labor market adjustment

GAP = (Y-Y*)/Y*

-THIS TERM IS TROUBLE

-it is hard to estimate in real time what the GDP Gap is

-the source of the trouble is estimating potential GDP

-it is hard to tell in real time what is happening to potential GDP

Change in intercept (z) shifts the monetary rule curve (up or down)

-find the new R at the same inflation rate

Change in R* merely is a movement along the curve

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