The Taylor Rule states that the
A) Fed should target the monetary base and not the federal funds rate.
B) use of an exchange rate target, although costly, is economically efficient.
C) Fed should adjust the federal funds rate to take account of deviations of inflation from its target and real GDP from potential GDP.
D) None of the above is correct.

Question

Quizplus · Accepted Answer

The Taylor Rule is a monetary policy guideline that recommends adjusting the federal funds rate in response to changes in inflation and real GDP. Specifically, the rule states that the Fed should increase the federal funds rate when inflation is above its target level or when real GDP is above potential GDP, and decrease the federal funds rate when inflation is below target or when real GDP is below potential GDP. Option A is incorrect because the Taylor Rule is concerned with the federal funds rate, not the monetary base. Option B is incorrect because the Taylor Rule does not involve an exchange rate target. Option D is incorrect because there is a correct answer.

The Taylor Rule States That the