If inflation is one percentage point above the Fed's target, the Taylor rule predicts that the Fed should:
A)raise the federal funds rate by 0.5 percentage points.
B)raise the federal funds rate by 1.0 percentage points.
C)reduce the federal funds rate by 1.5 percentage points.
D)reduce the federal funds rate by 1.0 percentage points.

Question

Quizplus · Accepted Answer

The Taylor rule suggests that for every one percentage point increase in inflation above the target, the Federal Reserve should raise the federal funds rate by 0.5 percentage points to counteract the inflation.

If Inflation Is One Percentage Point Above the Fed's Target