We have seen that short-run equilibrium output falls when the Fed raises the real interest rate. Suppose the relationship between short-run equilibrium output and the real interest rate r set by the Fed is given by: Y = 1,000 − 1,000r.

Suppose also that the Fed's reaction function is shown in the table below. Complete the table by computing the short-run equilibrium output for the whole-number inflation rates between 0 and 4 percent.

How should the environmental effects be dealt with when evaluating this project? the environmental effects should be ignored since the plant is legal without mitigation. the environmental effects should be treated as a sunk cost and therefore ignored. if the utility mitigates for the environmental effects, the project is not acceptable. however, before the company chooses to do the project without mitigation, it needs to make sure that any costs of "ill will" for not mitigating for the environmental effects have been considered in the original analysis. the environmental effects should be treated as a remote possibility and should only be considered at the time in which they actually occur. the environmental effects if not mitigated would result in additional cash flows. therefore, since the plant is legal without mitigation, there are no benefits to performing a "no mitigation" analysis.