According to the Taylor rule, if the central bank's announced inflation target is 2%, the current inflation rate is 2%, and output is 1% below the full-employment level, at what level should the central bank set the nominal interest rate?
A)1%
B)2%
C)3)5%
D)4%
E)5)5%

Question

Quizplus · Accepted Answer

According to the Taylor rule, the nominal interest rate should be set as follows:
Nominal interest rate = current inflation rate + equilibrium real interest rate + 0.5(inflation gap) + 0.5(output gap)
= 2% + 2% + 0.5(0% - 1%) + 0.5(-1%)
= 3.5%
Therefore, the best choice is (C)3)5%.

According to the Taylor Rule, If the Central Bank's Announced