Given the following formula for the Taylor rule: ?Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) if the current rate of inflation is 5%, the natural rate of interest is 2%, and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be: ?

Question

Given the following formula for the Taylor rule: ?Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap) if the current rate of inflation is 5%, the natural rate of interest is 2%, and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be: ?

Quizplus · Accepted Answer

The target federal funds rate is calculated as 2% (natural rate) + 5% (current inflation) + ½(5% - 2%) (inflation gap) + ½(3%) (output gap) = 10%.

Given the Following Formula for the Taylor Rule: ?Target Federal