In the Taylor rule, if the output coefficient ? is set to zero, then the central bank
A)is mostly concerned with maintaining full employment
B)always sets interest rates 2% above its inflation target
C)will aggressively lower interest rates as soon as output declines
D)engages in strict inflation targeting
E)none of the above

Question

Quizplus · Accepted Answer

With the output coefficient set to zero, the Taylor rule effectively becomes a strict inflation-targeting rule. This means that the central bank is only concerned with keeping inflation at or near its target level, and is not taking into account deviations from potential output or unemployment levels. As a result, the central bank will adjust interest rates solely in response to inflation deviations from its target.

In the Taylor Rule, If the Output Coefficient ? Is