Suppose a country faces an inflation rate = 5%; target inflation rate = 2%; current federal funds rate = 3%; current GDP is 4% below full-employment GDP, and long-run real GDP growth rate = 3%. Which statement correctly describes monetary policy actions that would be recommended according to the monetary rule, inflation targeting, and the Taylor rule?
A) The monetary rule would recommend contractionary policy; inflation targeting would recommend contractionary policy; the Taylor rule would recommend contractionary policy.
B) The monetary rule would recommend expansionary policy; inflation targeting would recommend expansionary policy; the Taylor rule would recommend expansionary policy.
C) The monetary rule would recommend ongoing steady expansion; inflation targeting would recommend expansionary policy; the Taylor rule would recommend contractionary policy.
D) The monetary rule would recommend ongoing steady expansion; inflation targeting would recommend contractionary policy; the Taylor rule would recommend expansionary policy.

Question

Quizplus · Accepted Answer

The monetary rule suggests steady growth in money supply, inflation targeting would recommend contractionary policy to reduce inflation to the target, and the Taylor rule would recommend expansionary policy due to GDP being below potential.

Suppose a Country Faces an Inflation Rate = 5%; Target