You are the Chair of the Federal Reserve Bank of the United States. The neutral rate of interest is 2%, the inflation rate is 3%, and the output gap is 1%. Using the Fed's rule of thumb, what is the appropriate new nominal federal funds rate that you should set for the economy?

Question

Quizplus · Accepted Answer

The Fed's rule of thumb is to set the nominal federal funds rate equal to the neutral rate of interest plus the inflation rate plus half the output gap. In this case, the neutral rate of interest is 2%, the inflation rate is 3%, and the output gap is 1%. Therefore, the appropriate new nominal federal funds rate is 2% + 3% + 0.5% = 5.5%.

You Are the Chair of the Federal Reserve Bank of the United