Between approximately 2001 and 2006,the Taylor rule predicted federal funds rate:
A)was greater than the actual federal funds rate.
B)was less than the actual federal funds rate.
C)was statistically equal to the actual federal funds rate.
D)The Taylor rule is used to predict the natural rate of unemployment.
E)was negatively correlated with the federal funds rate.

Question

Quizplus · Accepted Answer

The Taylor rule uses inflation and output gap to predict the appropriate level of the federal funds rate. During the period of 2001 to 2006, the actual federal funds rate was lower than what the Taylor rule predicted, which means that the Taylor rule predicted a higher federal funds rate. Therefore, Choice A, that the Taylor rule predicted federal funds rate was greater than the actual federal funds rate, is the correct answer.

Between Approximately 2001 and 2006,the Taylor Rule Predicted Federal Funds