According to the Taylor Rule:
A)for each 1 percent increase in the inflation rate above its target of 2 percent, the central bank should raise the real overnight lending rate by one percent point.
B)for each 1 percent increase in the inflation rate above its target of 2 percent, the central bank should raise the real overnight lending rate by one-half a percent point.
C)for each 1 percent increase in the inflation rate above its target of 2 percent, the central bank should lower the real overnight lending rate by one percent point.
D)for each 1 percent increase in the inflation rate above its target of 2 percent, the central bank should lower the real overnight lending rate by one-half a percent point.

Question

Quizplus · Accepted Answer

According to the Taylor Rule, for each 1 percent increase in the inflation rate above its target of 2 percent, the central bank should raise the real overnight lending rate by one-half a percent point. This is known as the Taylor Rule's "reaction function." The purpose of this rule is to stabilize the economy by adjusting the interest rate in response to changes in inflation and output growth.