The Taylor rule states that the federal funds target rate is 2% plus one-half the inflation gap plus one-half the output gap.

Question

Quizplus · Accepted Answer

The Taylor rule suggests setting the federal funds target rate based on three terms: a constant term (often 2%), the inflation gap (the difference between current inflation and the target inflation rate), and the output gap (the difference between actual and potential output). However, it typically involves the entire inflation gap and output gap, not one-half of each.

The Taylor Rule States That the Federal Funds Target Rate