Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap)
If the inflation rate in the economy were to fall by 2% below the target inflation rate, the target federal funds rate would:

Question

Quizplus · Accepted Answer

The Taylor rule suggests that for every 1% decrease in the inflation gap, the federal funds rate should decrease by 0.5%. A 2% decrease in inflation below the target results in a 1% decrease in the rate.

Given the Following Formula for the Taylor Rule: Target Federal