According to the Taylor rule, the Bank of Canada should set the target for the overnight interest rate equal to the sum of the equilibrium real overnight interest rate, the current inflation rate, one-half times the ________, and one-half times the ________.
A)interest rate gap; inflation gap
B)interest rate gap; output gap
C)inflation gap; output gap
D)unemployment gap; government-spending gap
E)real GDP growth gap; inflation gap

Question

Quizplus · Accepted Answer

The Taylor rule suggests that the central bank should set the nominal interest rate according to the equilibrium real interest rate, the current inflation rate, plus one-half the inflation gap (the difference between current inflation and the target inflation), and one-half the output gap (the difference between actual output and potential output).

According to the Taylor Rule, the Bank of Canada Should