4. Suppose the current price level is 148.7 and one year ago the price level was 147.3. Output is currently 13,021.8 and potential output is 13,643.2 (both in billions of 2009 dollars). The long term target federal funds rate is 3.5% and the target inflation rate is 2%.
a. What value of the federal funds rate would the Fed choose if it follows the Taylor rule?
b. Suppose that one year later, the price level has declined by 0.6%, output has declined by 1%, and potential output has increased 2%. In this new situation, what value of the federal funds rate would the Fed choose if it follows the Taylor rule?
c. What is the problem with setting the federal funds rate to follow the Taylor rule in this case?

5. Congress votes a special one-time $1000 million transfer to bail out the coal industry. Tax collections don't change, and no change is planned for at least several years. Assume that the nominal interest rate is constant at 4%.
By how much will this action increase the overall budget deficit and the primary deficit in the same year that the transfer is made?
By how much will this action increase the overall budget deficit and the primary deficit in the year after the transfer is made?
By how much will this action increase the overall budget deficit and the primary deficit in the second year after the transfer is made?

9. A country has an overall government budget deficit of $120 million, nominal GDP of $1100 million, and total government debt equal to $500 million. Nominal GDP is growing at an annual rate of 0.02.
a. Find the debt to GDP ratio of the country.
b. Find the largest overall budget deficit that the government can run without raising the debt to GDP ratio.
c. Now assume that the Nominal GDP is growing at an annual rate of 0.04. Find the largest overall budget deficit that the government can run without raising the debt to GDP ratio.

4. Suppose the current price level is 148.7 and one year ago the pr...