The Taylor rule can be written as FF rate = inflation + 2.0 + 0.5 (inflation - 2.0) + 0.5 (GDP gap), where FF rate is the nominal federal funds rate and the GDP gap is the percentage deviation of real GDP from its natural level. If inflation is 2 percent and GDP is at the natural rate, then according to the Taylor rule, the Fed should set the nominal federal funds rate at percent.
A)2
B)3
C)4
D)5

Question

Quizplus · Accepted Answer

With inflation at 2% and GDP at its natural rate, the GDP gap is 0. Plugging these values into the Taylor rule: FF rate = 2 + 2 + 0.5(2 - 2) + 0.5(0) = 4.

The Taylor Rule Can Be Written as FF Rate =