Suppose the inflation rate is 3 percent and the output gap is - 1 percent. Assuming the equilibrium real interest rate is 2 percent, using the Taylor rule, what target should the Fed set for the federal funds rate?

Question

Quizplus · Accepted Answer

The Taylor rule formula is: Federal Funds Rate = Equilibrium Real Interest Rate + Inflation Rate + 0.5 * (Inflation Gap) + 0.5 * (Output Gap). Here, Inflation Gap = 3% - 2% = 1%. So, Federal Funds Rate = 2% + 3% + 0.5 * 1% + 0.5 * (-1%) = 5%.

Suppose the Inflation Rate Is 3 Percent and the Output