The Taylor rule is most suitable to study the behaviour of a central bank with the dual mandate of
A) stable exchange rates and price stability.
B) price stability and maximum sustainable employment.
C) financial market stability and stable exchange rates.
D) maximum sustainable employment and financial market stability.

Question

Quizplus · Accepted Answer

The Taylor rule is a monetary policy rule that relates the setting of the central bank's interest rate target to the deviations of inflation from its target and the output gap from its potential level. This rule is most suitable for a central bank with a dual mandate of price stability and maximum sustainable employment, which is the case for the Federal Reserve in the United States. The other options (A, C, and D) refer to different policy objectives, which would require different monetary policy rules.

The Taylor Rule Is Most Suitable to Study the Behaviour