Suppose an economy faces a current federal funds rate = 2%; inflation rate = 3%; inflation rate target = 2%; current GDP is 3% higher than full-employment GDP. According to the Taylor rule, which policy approach should this country be using?

Question

Quizplus · Accepted Answer

The Taylor rule suggests that the federal funds rate should be adjusted based on the inflation rate and the output gap. With inflation above the target and GDP above full-employment, the rule would suggest a higher interest rate, indicating a need for tighter monetary policy.

Suppose an Economy Faces a Current Federal Funds Rate =