According to the Taylor rule, if there is an expansionary gap of 2 percent of potential output and inflation is 3 percent, what real interest rate will the Fed set?
A)1.5 percent
B)2 percent
C)2.5 percent
D)3.5 percent

Question

Quizplus · Accepted Answer

According to the Taylor rule, r = 0.01 + 0.5 (output gap as a percent of potential GDP)+ 0.5 (inflation rate). Substituting into the equation r = 0.01 + 0.5 (0.02)+ 0.5 (0.03)= 0.01 + 0.01 + 0.015 = 0.035, or 3.5 percent.

According to the Taylor Rule, If There Is an Expansionary