Imagine you are the chief economist at the Fed and you are trying to convince the Fed governor that she should follow the Taylor rule when setting the fed funds rate.

"I don't like this Taylor rule," she says. "I think I can do better than the rule."

"However, with the Taylor rule you do not have to think what to do. You just observe the inflation rate and the output growth, and set the interest rate accordingly," you say.

"But what would I have to do if output falls way too much and we hit the zero lower bound?" she says.

"Look, I suggest the following Taylor rule: , where is inflation and y is the deviation of output from the full-employment level," you say in response. "With this rule you will only reach the zero lower bound if:

a. output falls 5% below the full employment level and inflation accelerates to 10%

b. output falls by 6% below the full-employment level, while inflation remains at the current 2%.

c. output remains above the full-employment level, while inflation drops below zero.

d. output is at the full-employment level, while inflation recedes from the current 2% to 1%.

In each of the cases below, assume division x has a product that can be sold either to outside customers or to division y of the same company for use in its production process. the managers of the divisions are evaluated based on their divisional profits. case a b division x: capacity in units 200,000 200,000 number of units being sold to outside customers 200,000 160,000 selling price per unit to outside customers $ 90 $ 75 variable costs per unit $ 70 $ 60 fixed costs per unit (based on capacity) $ 13 $ 8 division y: number of units needed for production 40,000 40,000 purchase price per unit now being paid to an outside supplier $ 86 $ 74 required: 1. refer to the data in case a above. assume in this case that $3 per unit in variable selling costs can be avoided on intracompany sales. a. what is the lowest acceptable transfer price from the perspective of the selling division? b. what is the highest acceptable transfer price from the perspective of the buying division? c. what is the range of acceptable transfer prices (if any) between the two divisions? if the managers are free to negotiate and make decisions on their own, will a transfer probably take place?