If the Fed were to set policy according to the Taylor rule, then if real GDP falls by 2 percent below potential GDP, the Fed should
A)raise the real federal funds rate by 1 percentage point.
B)reduce the real federal funds rate by 1 percentage point.
C)raise the inflation rate by 1 percentage point.
D)change the real federal funds rate until inflation hits the target rate of 4 percent.

Question

Quizplus · Accepted Answer

According to the Taylor rule, the Fed should reduce the real federal funds rate when real GDP falls below potential GDP to stimulate economic activity.

If the Fed Were to Set Policy According to the Taylor