If the current rate of inflation is 4% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be:

Question

Quizplus · Accepted Answer

The Taylor rule states that the target federal funds rate should be equal to the inflation rate plus the equilibrium real federal funds rate plus 0.5 times the difference between the actual and potential output gap. In this case, the target federal funds rate would be:

2% + 0.5(3% - 0%) + 0% = 8.5%

If the Current Rate of Inflation Is 4% and the Target