If the current rate of inflation is 1 percent, using the values suggested by Professor Taylor, $\bar { r } = 2 \% ; \bar { \pi } = 2 \% ; \bar { m } = 1 / 2 \%$ , the Taylor rule predicts a federal funds rate of:
A) 0 percent
B) 1.5 percent
C) 1 percent
D) 0.5 percent
E) 3.5 percent

Question

Quizplus · Accepted Answer

The Taylor rule formula is: Federal Funds Rate = $\bar{r} + \bar{\pi} + 0.5(\pi - \bar{\pi}) + 0.5(y - \bar{y})$. With $\pi = 1\%$, $\bar{\pi} = 2\%$, $\bar{r} = 2\%$, and assuming output gap $y - \bar{y} = 0$, the rate is $2\% + 1\% + 0.5(1\% - 2\%) = 1.5\%$.

If the Current Rate of Inflation Is 1 Percent, Using rˉ=2%;πˉ=2%;mˉ=1/2%\bar { r } = 2 \% ; \bar { \pi } = 2 \% ; \bar { m } = 1 / 2 \%rˉ=2%;πˉ=2%;mˉ=1/2%

If the Current Rate of Inflation Is 1 Percent, Using $\bar { r } = 2 \% ; \bar { \pi } = 2 \% ; \bar { m } = 1 / 2 \%$