Given the following Taylor rule:
Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap);
Since the coefficients on the inflation and output gaps are equal, does this mean the central bank will respond to a one percent increase in inflation with the same change in the target rate as they would initiate from a one percent increase in the output gap? Explain.

Question

Quizplus · Accepted Answer

The Answer of Given the following Taylor rule:
Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap);
Since the coefficients on the inflation and output gaps are equal, does this mean the central bank will respond to a one percent increase in inflation with the same change in the target rate as they would initiate from a one percent increase in the output gap? Explain.

Given the Following Taylor Rule