According to the Taylor rule,if inflation in the last year was 6% and output was 2% below its full-employment level,the nominal Fed funds rate should be
A)3%.
B)5%.
C)7%.
D)9%.

Question

Quizplus · Accepted Answer

The Taylor rule suggests setting the nominal interest rate based on the inflation rate and the output gap. With 6% inflation and 2% output gap, the rule would suggest a higher rate, typically calculated as: nominal rate = neutral rate + 1.5*(inflation - target inflation) + 0.5*(output gap). Assuming a neutral rate of 2% and target inflation of 2%, the calculation would suggest a rate around 9%.

According to the Taylor Rule,if Inflation in the Last Year