Suppose that the Reserve Bank of New Zealand is following the Taylor rule. In 2009, it sets the official cash rate (the N.Z. equivalent of the overnight loans rate)at 4.0 percent a year. If the inflation rate in New Zealand is 2.0 percent a year, what is its output gap?

Question

Quizplus · Accepted Answer

The Taylor rule sets the policy rate as a function of the inflation rate and the output gap. In this case, the inflation rate is 2.0 percent and the policy rate is 4.0 percent. The Taylor rule implies that the output gap is 0 percent.

Suppose That the Reserve Bank of New Zealand Is Following