According to the Taylor rule, the lower the inflation rate, other things equal, the
A) lower the federal funds target rate.
B) higher the federal funds target rate.
C) lower the discount rate.
D) higher the unemployment rate.

Question

Quizplus · Accepted Answer

According to the Taylor rule, the federal funds target rate should be adjusted in response to changes in inflation and the output gap. Specifically, the rule suggests that the federal funds rate should be raised by more than one percentage point for every one percentage point increase in inflation. Therefore, if the inflation rate is lower, the federal funds target rate should be lowered to stimulate economic growth and increase inflation.

According to the Taylor Rule, the Lower the Inflation Rate