According to the Taylor rule, if the Federal Reserve tries to target inflation near 2%, the inflation rate is 1.5%, and output is 2.3% below potential GDP, the target federal funds rate is 4.4%.

Question

Quizplus · Accepted Answer

The Taylor rule equation is:
Target federal funds rate = neutral real interest rate + inflation rate + (0.5 x inflation gap) + (0.5 x output gap)
Assuming a neutral real interest rate of 2%, and inflation target of 2%, the equation becomes:
Target federal funds rate = 2% + 2% + (0.5 x (2% - 1.5%)) + (0.5 x 2.3%) = 3.65%
Therefore, the correct answer is B.

According to the Taylor Rule, If the Federal Reserve Tries