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olganol [36]
3 years ago
10

If real GDP is 2% below potential GDP, and the inflation rate is 1%, then according to the Taylor rule, the Fed should make the

real federal funds rate:
A. Decrease by 1.5%
B. Decrease by 3%
C. Increase by 3%
D. Decrease by 1%

The answer is A. Decrease by 1.5%. Give a detailed explanation why.
Business
1 answer:
Anastasy [175]3 years ago
7 0

Answer:

The correct answer is option A.

Explanation:

The Taylor rule was given by John Taylor. It states that a 1% increase in the inflation rate should cause the banks to increase the interest rate by more than 1%.  

Real GDP is 2% below potential GDP.

The inflation rate is 1%.

According to the Taylor rule, the real federal funds rate should be

= Inflation rate - 0.5 (Real GDP gap - Inflation rate)

= 2 - 0.5 (2-1)

= 2 - 0.5  

= 1.5

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<h3>Why is the curve as stated about?</h3>

Because a fixed cost is constant, this is not shown on the graph, however, the movement of the variable cost impacts directly on the total cost as well but it will be higher.

Hence, the appropriate labels for Curves N and M in the nearby graph is that the Curve N is total cost and Curve M is total variable cost.

Therefore, the Option C is correct.

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masha68 [24]

Answer:

Edelman's market/book = 2.29

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Explanation:

Firstly, we need to calculate enterprise value (EV) & fiem value (FV) of Edelman Engines as below:

EV =  Market value of equity + Net market value of debt

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FV = Market value of equity + Market value of debt

     = Stock price x Number of share outstanding + Market value of debt

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Edelman's EV/EBITDA = 11.36/1.08 = 10.52

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