Suppose the equilibrium real federal funds rate is 3 percent,the target rate of inflation is 3 percent,the current inflation rate is 1 percent,and real GDP is 8 percent below 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 = 1% - 3% = -2%. Output Gap = (Real GDP - Potential GDP)/Potential GDP = -8%. Plugging these into the formula: 3% + 1% + 0.5*(-2%) + 0.5*(-8%) = 3% + 1% - 1% - 4% = -1%.

Suppose the Equilibrium Real Federal Funds Rate Is 3 Percent,the