According to the Taylor rule, the overnight interest rate should be set at ________. A) π + i_or - 0.5(π - π ) - 0.5(y - y) B) π + i_or + 0.5(π - π ) + 0.5(y - y) C) r + π D) r - π

Question

Quizplus · Accepted Answer

The Taylor rule suggests that the overnight interest rate should be set as: r = π + i_or + 0.5(π - π*) + 0.5(y - y*) where, r = overnight interest rate π = inflation rate i = target inflation rate S = sensitivity coefficient (usually set at 0.5) U = output gap B = long-run equilibrium interest rate π* = target inflation rate y = actual output level y* = potential output level Option B represents the correct formulation of the Taylor rule, with all the required parameters mentioned. The other options either miss some parameters or have incorrect signs in the equation. Therefore, option B is the best choice.

According to the Taylor Rule, the Overnight Interest Rate Should