The Taylor rule links the Federal Reserve's target for the
A)money supply to shifts in money demand.
B)money supply to changes in interest rates.
C)federal funds rate to economic variables.
D)federal funds rate to the money supply.

Question

Quizplus · Accepted Answer

The Taylor rule links the federal funds rate to economic variables such as inflation and output. It is a guideline for the Fed to set the target for the federal funds rate based on the current state of the economy. The rule takes into account the current inflation rate, the so-called neutral rate of interest, and the difference between actual output and potential output. The goal is to keep inflation under control while promoting economic growth. The Taylor rule does not directly link the money supply to interest rates, so choices A and B are incorrect. Choice D is also incorrect as the Taylor rule deals with the federal funds rate, not the money supply.

The Taylor Rule Links the Federal Reserve's Target for the