What is the Taylor Rule?
A)The overnight loan rate is set in response to the current inflation rate and to the current estimate of the output gap.
B)The monetary base is set in response to the current inflation rate and to the current estimate of the output gap.
C)The monetary base should grow at a rate equal to the target inflation rate plus the long-term real GDP growth rate minus the medium-term velocity growth rate.
D)The money supply should grow at a rate equal to the long-run real growth rate.
E)The money supply should be regulated by setting the exchange rate equal to purchasing power parity with other countries.

Question

Quizplus · Accepted Answer

The Taylor Rule is a monetary policy rule that suggests that the central bank should adjust the nominal interest rate in response to changes in inflation and the output gap. The specific formula for the rule is often expressed as: nominal interest rate = target inflation rate + equilibrium real interest rate + 0.5(inflation gap) + 0.5(output gap). The rule is named after economist John Taylor who first proposed it in 1993. Choice A best represents the Taylor Rule as it states that the overnight loan rate should be set in response to the current inflation rate and the current estimate of the output gap.

What Is the Taylor Rule