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 aggregate demand increases and real GDP exceeds potential GDP, the Fed should raise the federal funds rate to prevent inflation. This is achieved by selling government securities in the open market, which reduces the money supply and increases interest rates.

Suppose That Initially Real GDP Equals Potential GDP