Which of the following correctly represents the Taylor rule?
A) i = Π + i* + a(Π - Π*) / b (GDP - GDP*), where Π is the inﬂation rate, Π* is the target inﬂation rate, GDP* is the potential GDP, and i* is the real interest rate.
B) i = Π + i* + a(Π - Π*) + b (GDP - GDP*), where Π is the inﬂation rate, Π* is the target inﬂation
C) i = Π + i* + a(Π - Π*) - b (GDP - GDP*), where Π is the inﬂation rate, Π* is the target inﬂation rate, GDP* is the potential GDP, and i* is the real interest rate.
D) i = Π + i* + a(Π - Π*) * b (GDP - GDP*), where Π is the inﬂation rate, Π* is the target inﬂation

Question

Quizplus · Accepted Answer

The Taylor rule formula is i = Π + i* + a(Π - Π*) + b (GDP - GDP*), which suggests how central banks should adjust nominal interest rates in response to changes in inflation and GDP relative to their target levels and potential output, respectively.

Which of the Following Correctly Represents the Taylor Rule