If real GDP is 2 percent below potential GDP and the inflation rate is 1 percent, then according to the Taylor rule, the Fed should make the real federal funds rate

Question

Quizplus · Accepted Answer

According to the Taylor rule, the Fed should adjust the real federal funds rate based on the output gap and inflation. With real GDP 2% below potential, the output gap is -2%. The Taylor rule suggests decreasing the rate by 1.5 times the output gap, which is -3%, but since the inflation rate is 1%, the net decrease is 1.5%.

If Real GDP Is 2 Percent Below Potential GDP and the Inflation