John Taylor's rule for setting the federal funds rate proposes increasing the nominal federal funds rate as inflation
And the GDP gap .
A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question

Quizplus · Accepted Answer

John Taylor's rule suggests that the nominal federal funds rate should be increased as inflation and the GDP gap increase. The GDP gap is the difference between the actual level of GDP and its potential level. Therefore, if both inflation and the GDP gap are increasing, it indicates that the economy is overheating and requires tighter monetary policy. This can be achieved by increasing the federal funds rate.

John Taylor's Rule for Setting the Federal Funds Rate Proposes