Using the Taylor rule, if the current inflation rate exceeds the target inflation rate and real GDP exceeds potential GDP, then the overnight interest target rate ________ the sum of the current inflation rate plus the equilibrium real overnight interest rate.
A)will be greater than
B)will be less than
C)will be the same as
D)may be greater than or less than

Question

Quizplus · Accepted Answer

According to the Taylor rule, if inflation is above target and GDP is above potential, the central bank should increase the interest rate. This means that the overnight interest target rate will be higher than the equilibrium real overnight interest rate, which is the sum of the target inflation rate and the neutral real interest rate. Increasing the interest rate will help to cool down the economy and bring inflation back to target. Therefore, the correct answer is A - the overnight interest target rate will be greater than the sum of the current inflation rate plus the equilibrium real overnight interest rate.

Using the Taylor Rule, If the Current Inflation Rate Exceeds