If output falls 1.0 percentage point below its potential, the Taylor rule predicts that the Fed should:
A)reduce the federal funds rate by 0.5 percentage points.
B)reduce the federal funds rate by 1.0 percentage points.
C)raise the federal funds rate by 1.5 percentage points.
D)raise the federal funds rate by 1.0 percentage points.

Question

Quizplus · Accepted Answer

The Taylor rule suggests that for every 1 percentage point that actual output falls below potential output, the Federal Reserve should reduce the federal funds rate by 0.5 percentage points to stimulate the economy.

If Output Falls 1