Assume that the actual inflation rate is 3 percent, the target inflation rate is 3 percent, and that the percentage difference between actual and potential real GDP is 2 percent. According to the Taylor rule, the federal funds rate target should be

Question

Quizplus · Accepted Answer

The Taylor rule states that the federal funds rate target should be equal to the sum of the inflation rate and the percentage difference between actual and potential real GDP, plus one-half of the difference between the actual inflation rate and the target inflation rate. Using the given values:
Federal funds rate target = 3% + 2% + (1/2)(3% - 3%) = 6.5%
Therefore, the best choice is option B.

Assume That the Actual Inflation Rate Is 3 Percent, the Target