According to the Taylor rule, the overnight interest rate should be set at ________.
A)π + iₒᵣ - 0.5(π - π*) - 0.5(y - y)
B)π + iₒᵣ + 0.5(π - π*) + 0.5(y - y)
C)r + π
D)r - π

Question

Quizplus · Accepted Answer

According to the Taylor rule, the overnight interest rate should be set at the inflation target (π*) plus the current short-term interest rate (iₒᵣ), plus 0.5 times the difference between actual inflation (π) and the inflation target (π*), plus 0.5 times the difference between actual output (y) and potential output (y*). Therefore, the correct formula is π + iₒᵣ + 0.5(π - π*) + 0.5(y - y*). Thus, answer B is correct.

According to the Taylor Rule, the Overnight Interest Rate Should