Using the Taylor rule,if the current inflation rate equals the target inflation rate and real GDP is less than potential GDP,then the federal funds target rate ________ the sum of the current inflation rate plus the real equilibrium federal funds rate.
A)will be greater than
B)will be less than
C)will be the same as
D)may be greater than or less than

Question

Quizplus · Accepted Answer

According to the Taylor rule, if the actual output is less than the potential output, then the Federal Reserve should lower the federal funds rate below the equilibrium rate to stimulate the economy. Therefore, if current inflation rate equals the target inflation rate and real GDP is less than potential GDP, the Federal Reserve would want to lower the federal funds rate below the equilibrium rate. Thus, the federal funds target rate will be less than the sum of the current inflation rate plus the real equilibrium federal funds rate.

Using the Taylor Rule,if the Current Inflation Rate Equals the Target