Conducting monetary policy so that FF rate = inflation+ 0.5 (inflation - 2) + 0.5 (GDP gap), where FF rate is the nominal federal funds interest rate and GDP gap if the percentage shortfall of real GDP from its natural level, is an example of:
A)an active policy rule.
B)a passive policy rule.
C)discretionary policy.
D)an automatic stabilizer.

Question

Quizplus · Accepted Answer

This is an example of an active policy rule because it explicitly sets a target for the federal funds rate based on current economic conditions (inflation and the GDP gap). It does not rely on discretion or automatic stabilizers.

Conducting Monetary Policy So That FF Rate = Inflation+ 0