Suppose the equilibrium real federal funds rate is 5 percent,the target rate of inflation is 3 percent,the current inflation rate is 5 percent,and real GDP is 4 percent above potential real GDP.If the weights for the inflation gap and the output gap are both 1/2,then according to the Taylor rule the federal funds target rate equals

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Quizplus · Accepted Answer

The Taylor rule formula is: Federal Funds Rate = Equilibrium Real Rate + Current Inflation + 0.5*(Inflation Gap) + 0.5*(Output Gap). Here, Inflation Gap = Current Inflation - Target Inflation = 5% - 3% = 2%. Output Gap = Real GDP above potential = 4%. So, Federal Funds Rate = 5% + 5% + 0.5*(2%) + 0.5*(4%) = 13%.

Suppose the Equilibrium Real Federal Funds Rate Is 5 Percent,the