Suppose that initially real GDP equals potential GDP. Then an increase in aggregate demand occurs. According to the Taylor rule, the Fed should the federal funds rate by _ government securities in the open market.

Question

Quizplus · Accepted Answer

According to the Taylor rule, when there is an increase in aggregate demand, the Fed should respond by raising the federal funds rate. This would be done by selling government securities in the open market, which would decrease the money supply and increase interest rates, ultimately reducing aggregate demand to its original level. Therefore, option B is the correct answer.

Suppose That Initially Real GDP Equals Potential GDP