According to the Taylor rule, if real GDP is 4 percent below potential GDP, the Fed should
A)lower the federal funds rate by 2 percentage points.
B)lower the federal funds rate by 4 percentage points.
C)lower the federal funds rate by 8 percentage points.
D)do nothing, as the economy will correct itself.

Question

Quizplus · Accepted Answer

The Taylor rule suggests adjusting the federal funds rate based on the output gap and inflation. A 4% output gap typically suggests a 2 percentage point reduction in the rate.

According to the Taylor Rule, If Real GDP Is 4