If the Fed follows the Taylor rule and actual inflation is below the inflation target set by the Fed,
A)the Fed should reduce the nominal federal funds rate.
B)the Fed should reduce the supply of money.
C)the Fed should charge a higher tax rate.
D)the Fed should spend lesser money.

Question

If the Fed follows the Taylor rule and actual inflation is below the inflation target set by the Fed,
A)​the Fed should reduce the nominal federal funds rate.
B)​the Fed should reduce the supply of money.
C)​the Fed should charge a higher tax rate.
D)​the Fed should spend lesser money.

Quizplus · Accepted Answer

According to the Taylor rule, if actual inflation is below the inflation target, the Fed should reduce the nominal federal funds rate in order to stimulate economic growth and increase inflation towards the target. This is because lower interest rates encourage borrowing and spending, which can boost demand for goods and services and increase inflationary pressures in the economy. Reducing the supply of money, charging a higher tax rate, or spending less money are not likely to be effective solutions for increasing inflation in this scenario.

If the Fed Follows the Taylor Rule and Actual Inflation