Suppose that initially real GDP equals potential GDP. Then a decrease 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, a decrease in aggregate demand would result in a decrease in inflationary pressure. In response, the Fed should lower the federal funds rate to stimulate economic activity and investment. This can be achieved by buying government securities in the open market, which increases the money supply and reduces interest rates. Therefore, the correct option is C, lower the federal funds rate by buying government securities in the open market.

Suppose That Initially Real GDP Equals Potential GDP