Suppose the current real federal funds rate in the economy is 3.0%, the current inflation rate is 1.5%, the Federal Reserve's target inflation rate is 2.0%, and the output gap is -2.0%. According to the Taylor Rule, the Federal Reserve's target federal funds rate should be

Question

Quizplus · Accepted Answer

The Taylor Rule formula is: Target Rate = Neutral Rate + 0.5*(Inflation Gap) + 0.5*(Output Gap). Assuming a neutral rate of 2%, the calculation is: 2% + 0.5*(1.5%-2.0%) + 0.5*(-2.0%) = 3.25%.

Suppose the Current Real Federal Funds Rate in the Economy