According to the Taylor rule,
A)if real GDP rises by 2 percent above potential GDP, the Fed should raise the real federal funds rate by 1 percentage point.
B)when real GDP is equal to potential GDP and inflation is equal to its target of 4 percent, the federal funds rate should be kept at 2 percent.
C)if inflation falls by 1 percentage point below its target of 2 percent, then the Fed should raise the real federal funds rate by one-half a percentage point.
D)all of these are appropriate Fed actions.

Question

Quizplus · Accepted Answer

The Taylor rule suggests that for every 1% increase in real GDP above potential GDP, the Fed should raise the real federal funds rate by 0.5 percentage points. Therefore, a 2% increase in GDP would warrant a 1 percentage point increase in the rate.

According to the Taylor Rule