Using the following information to answer below questions.
You are hired as a Fed governor for the central bank in Argentina. You are dealing with rampant inflation but also growing unemployment, and you need to guide monetary If we assume the following data:
O Expected Inflation = 32.5%
O Target Inflation = 20%
O GDP Expected = -3%
O GDP Long Term Trend -5.8%
O Neutral Rate = 12%
Question 1:
Based on the Taylor Rule, what would you recommend the central bank do?
a. Raise rates
b. Lower rates
c. Maintain rates
d. Quantitative easing
Question 2:
What does the Taylor Rule imply about the state of the Argentinian Economy?
a. That GDP growth needs to be stimulated
b. That inflation needs to be placed in check
c. The yield curve has inverted
d. Everything is fine

Question 1. a. Raise rates.

Question 2. b. That inflation needs to be placed in check.

Explanation:

The Taylor rule as presented by Economist John Taylor in 1993 in his study "Discretion Versus Policy Rules in Practice", is an interest rate forecasting model that suggests how Central Banks should control the interest rates to control inflation and other Economic conditions.

For Question 1 then, the Central Bank should RAISE RATES because their Target Inflation is less than their Expected Inflation. This would have the effect of reducing money supply which would in theory, reduce inflation.

For Question 2, Inflation needs to be placed in check as it is putting the economy out of equilibrium.

Inflation therefore needs to be controlled by the Central Bank to achieve the equilibrium that it wants.

If you need any clarification please feel free to comment or react. This would also help other users. Thank you.

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