The Taylor rule suggests to a central bank
A)how to set interest rates in response to a change in economic activity
B)that interest rates should be raised by 1.5% if inflation goes 1% above its announced target
C)that interest rates should be raised by 0.5% if the GDP gap rises by 1%
D)that real interest rates should be increased to cool off the economy whenever inflation rises
E)all of the above

Question

Quizplus · Accepted Answer

The Taylor rule provides guidance to central banks on how to adjust interest rates in response to changes in economic activity. It recommends that interest rates should be raised by 1.5% if inflation goes 1% above its target and that interest rates should be raised by 0.5% if the GDP gap rises by 1%. The rule also suggests that real interest rates should be increased to cool off the economy whenever inflation rises. Therefore, all of the above choices are correct.

The Taylor Rule Suggests to a Central Bank