According to the Taylor rule,
A) the Fed would have the discretion to choose an appropriate inflation rate
B) the Fed would announce targets for the inflation rate and real GDP
C) the Fed would allow the inflation rate to increase by about 0.5 percent per year
D) the Fed would allow the price level to increase by about 0.5 percent per year
E) Congress would set an annual inflation rate target.

Question

Quizplus · Accepted Answer

According to the Taylor rule, the Fed would announce targets for the inflation rate and real GDP. The rule suggests that the federal funds rate should be adjusted based on the difference between the current inflation rate and target inflation rate, as well as the difference between the current real GDP and potential GDP. Therefore, the rule proposes a systematic approach for conducting monetary policy rather than giving the Fed the discretion to choose an appropriate inflation rate (A) or allowing the inflation rate or price level to increase by a certain amount each year (C, D). Congress does not set annual inflation rate targets (E).

According to the Taylor Rule