According to the Taylor, if there is a recessionary gap of 3 percent of potential output and inflation is 4 percent, what real interest rate will the Fed set?

Question

Quizplus · Accepted Answer

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 (-0.03) + 0.5 (0.04) = 0.01 - 0.015 + 0.02 = 0.015 or 1.5%.

According to the Taylor, If There Is a Recessionary Gap