If the Fed follows the Taylor rule and the economy goes into a recession, the Fed would

Question

Quizplus · Accepted Answer

The Taylor rule suggests that the Federal Reserve (Fed) should adjust the federal funds rate in response to changes in inflation and the output gap. During a recession, the output gap is negative (actual output is below potential output), so according to the Taylor rule, the Fed would lower the federal funds rate to stimulate economic activity. Reducing tax rates and increasing government expenditures are fiscal policy measures, not actions typically taken by the Fed.

If the Fed Follows the Taylor Rule and the Economy