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 4%, 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 4%, 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

Using the given formula for the Taylor rule, we can plug in the values:

Target federal funds rate = 2% + 4% + 0.5(4%-2%) + 0.5(3%)

= 2% + 4% + 1% + 1.5%

= 8.5%

Therefore, the target federal funds rate is 8.5%. Answer choice B is correct.

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