Conducting monetary policy so that the overnight rate = π + 0.5(π - 2) + 0.5 (GDP gap), where the overnight rate is the nominal overnight interest rate, π is the annual inflation rate, and GDP gap is the percentage shortfall of real GDP from its natural level, is an example of:
A)an active policy rule.
B)a passive policy rule.
C)discretionary policy.
D)an automatic stabilizer.

Question

Quizplus · Accepted Answer

This is an example of an active policy rule, specifically a Taylor rule, which prescribes how the central bank should adjust the nominal interest rate in response to changes in inflation and the GDP gap.

Conducting Monetary Policy So That the Overnight Rate = π