The Taylor rule relates
A)the nominal Fed funds rate to inflation over the past year and the deviation of output from full-employment output.
B)the growth rate of the monetary base to the growth rate of nominal GDP and the change in velocity over the past year.
C)the nominal Fed funds rate to the growth rate of nominal GDP and the change in velocity over the past year.
D)the growth rate of the monetary base to inflation over the past year and the deviation of output from full-employment output.

Question

Quizplus · Accepted Answer

The Taylor rule is a monetary policy guideline that suggests adjusting the nominal interest rate in response to changes in inflation and the output gap. The rule states that the nominal interest rate should be set equal to the sum of a target inflation rate, an estimate of the output gap, and a constant that reflects the responsiveness of the central bank to changes in inflation and the output gap. Therefore, the Taylor rule relates the nominal Fed funds rate to inflation over the past year and the deviation of output from full-employment output, as described in choice A.

The Taylor Rule Relates