If the Federal Reserve tries to target inflation near 2%,the inflation rate is 3%,and output is 1.3% above potential GDP,the target federal funds rate according to the Taylor rule is 6.15%.

Question

Quizplus · Accepted Answer

According to the Taylor rule, the target federal funds rate would be calculated as follows:

Target federal funds rate = current federal funds rate + 1.5*(inflation rate - target inflation rate) + 0.5*(output gap)

Using the given values:

Target federal funds rate = current federal funds rate + 1.5*(3% - 2%) + 0.5*(1.3%)

Simplifying:

Target federal funds rate = current federal funds rate + 1.5% + 0.65%

Since the Federal Reserve is targeting inflation near 2%, it is likely that the current federal funds rate is already higher than the target federal funds rate. Therefore, the target federal funds rate based on the current conditions would be higher than the current federal funds rate. Based on the given information, the target federal funds rate would be 6.15%, which is higher than the current federal funds rate. Therefore, the statement is true.

If the Federal Reserve Tries to Target Inflation near 2%,the