According to the Taylor rule, if real GDP rises 1.0 % over potential GDP, the Fed should, _____.
A)raise the federal funds rate by 5% relative to the inflation rate
B)raise the federal funds rate by 1% relative to the inflation rate
C)raise the federal funds rate by 2% relative to the inflation rate
D)raise the federal funds rate by 0.5% relative to the inflation rate
E)keep the federal funds rate at 4 percent

Question

Quizplus · Accepted Answer

The Taylor rule suggests that for every 1% increase in real GDP over potential GDP, the federal funds rate should be raised by 0.5% relative to the inflation rate.

According to the Taylor Rule, If Real GDP Rises 1