The Taylor rule can be written as FF rate = π + 2.0 + 0.5(π - 2.0) + 0.5(GDP gap), where FF rate is the nominal federal funds rate, π is the inflation rate, and the GDP gap is the percentage deviation of real GDP from its natural level. If inflation is 2 percent and the GDP gap is -2 percent, then according to the Taylor rule, the Fed should set the nominal federal funds rate at percent.
A)2
B)3
C)4
D)5

Question

Quizplus · Accepted Answer

The Taylor rule formula gives FF rate = 2 + 2.0 + 0.5(2 - 2.0) + 0.5(-2) = 4 - 1 = 3 percent.

The Taylor Rule Can Be Written as FF Rate =