According to the Taylor Rule: if the inflation rate is 2% and the GDP gap is 3%,what does the federal funds rate target equal?
A) 9.5 percent
B) 7.5 percent
C) 5.5 percent
D) 8.5 percent

Question

Quizplus · Accepted Answer

According to the Taylor Rule, the federal funds rate target equals the inflation rate plus the sum of the equilibrium real interest rate (2%) and half of the GDP gap (1.5%). Therefore, federal funds rate target equals 2% + 1.5% = 3.5%. However, the answer choices do not include 3.5%. The closest option is 5.5%, which is 2 percentage points higher than the Taylor Rule calculation. Therefore, Choice C is the best answer.

According to the Taylor Rule: If the Inflation Rate Is