The Taylor Rule specifies that the federal funds rate target should be equal to
A) 0.5 ( inflation rate)+ 1.5 (GDP gap)+ 1
B) 1.5 (inflation rate)+ 0.5 (GDP gap)+ 1.
C) interest rate - expected inflation rate.
D) equilibrium federal funds rate + inflation rate +1

Question

Quizplus · Accepted Answer

The Taylor Rule equation is expressed as follows: federal funds rate target = current inflation rate + equilibrium interest rate + 0.5 (inflation gap) + 0.5 (output gap). However, in this question, the equilibrium interest rate is represented as 1, which substitutes the actual equilibrium interest rate. Therefore, the correct equation for this question becomes: federal funds rate target = current inflation rate + 1 + 0.5 (inflation gap) + 0.5 (output gap). Option B is the correct answer as it matches this equation.

The Taylor Rule Specifies That the Federal Funds Rate Target