# Calculate the output gap as the percentage deviat

## Calculate the output gap as the percentage deviation of output from the potential level of output. Use the output and inflation gaps to calculate, for each quarter, the fed funds rate predicted by the Taylor rule

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Go to the St. Louis Federal Reserve FRED database (https://fred.stlouisfed.org/), and find data on the personal consumption expenditure price index (PCECTPI), real GDP (GDPC1), an estimate of potential GDP (GDPPOT), and the federal funds rate (DFF). For the price index, adjust the units setting to “Percent Change From Year Ago” to convert the data to the inflation rate; for the federal funds rate, change the frequency setting to “Quarterly” and then “Average”. Download the data into a spreadsheet. Assuming the inflation target is 2%, calculate the inflation gap and the output gap for each quarter, from 2000 until the most recent quarter of data available. Calculate the output gap as the percentage deviation of output from the potential level of output. Use the output and inflation gaps to calculate, for each quarter, the fed funds rate predicted by the Taylor rule (see reading list below). Assume that the weights on inflation stabilization and output stabilization are both 0.5. Plot your results and compare the current federal funds rate to the federal funds rate prescribed by the Taylor rule. In this essay, discuss how bank behaviour and the Fed’s behaviour may have caused money supply growth to be pro-cyclical (rising during booms and falling during recessions) before the crisis. What has changed since 2008-09? Use the graph you generated to make your point. The graph counts towards 25% of your coursework grade.