According to the Taylor rule, when the economy is at full employment and inﬂation is at its target rate of 2 percent, the Fed should
A) carefully lower the federal funds rate in an attempt to stimulate noninﬂationary real GDP growth.
B) raise the federal funds rate in an attempt to eliminate the remaining inﬂation.
C) lower the federal funds rate to lower borrowing costs for the federal government.
D) keep their targeted interest rate at 4 percent.

Question

Quizplus · Accepted Answer

The Taylor rule suggests that when the economy is at full employment and inflation is at the target rate (typically 2%), the Federal Reserve should set the nominal federal funds rate at 4%, assuming a real federal funds rate of 2% plus the inflation rate of 2%.

According to the Taylor Rule, When the Economy Is at Full