Suppose the inflation rate is 3 percent and the output gap is -1 percent. Using the Taylor rule, the Bank of Canada sets the overnight loans rate equal to
A)5 percent.
B)6 percent.
C)4 percent.
D)1 percent.
E)5.5 percent.

Question

Quizplus · Accepted Answer

The Taylor rule formula is: Interest Rate = Neutral Rate + 0.5 * (Inflation Rate - Target Inflation Rate) + 0.5 * Output Gap. Assuming a neutral rate of 2% and a target inflation rate of 2%, the calculation is: 2% + 0.5*(3%-2%) + 0.5*(-1%) = 5%.

Suppose the Inflation Rate Is 3 Percent and the Output