Given the following Taylor rule:
Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap)
Explain what happens to the real interest rate and why it happens, each time inflation increases by 1 percent.

Question

Given the following Taylor rule: 
Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap)
Explain what happens to the real interest rate and why it happens, each time inflation increases by 1 percent.

Quizplus · Accepted Answer

The Answer of  Given the following Taylor rule: 
Target federal funds rate = natural rate of interest + current inflation + ½(inflation gap) +½(output gap)
Explain what happens to the real interest rate and why it happens, each time inflation increases by 1 percent.

Given the Following Taylor Rule