Suppose the inflation rate is 3 percent and the output gap is -1 percent.Assuming the equilibrium real interest rate is 2 percent,using the Taylor rule,what target should the Fed set for the federal funds rate?

Question

Quizplus · Accepted Answer

The Taylor rule formula is: Federal Funds Rate = Equilibrium Real Interest Rate + Inflation Rate + 0.5 * Output Gap + 0.5 * (Inflation Rate - Target Inflation Rate). Assuming the target inflation rate is 2%, the calculation is: 2% + 3% + 0.5*(-1%) + 0.5*(3%-2%) = 5%.

Suppose the Inflation Rate Is 3 Percent and the Output