According to the Taylor rule,the Fed should:
A) lower the fed funds rate by 0.5% if GDP increases 1.0% over potential GDP.
B) raise the fed funds rate by 0.5% if GDP increases 1.0% over potential GDP.
C) raise the fed funds rate by 1.0% if GDP increases 0.5% over potential GDP.

Question

Quizplus · Accepted Answer

The Taylor rule states that the Fed should raise the fed funds rate by 0.5% if GDP increases 1.0% over potential GDP. Therefore, B is the correct answer. A is incorrect because the Fed should actually raise the fed funds rate instead of lowering it, while C is incorrect because the Fed should only raise the fed funds rate by 0.5% instead of 1.0%.

According to the Taylor Rule,the Fed Should