Assuming the simple Taylor rule for dictating the federal funds rate, when the actual federal funds rate deviates from the suggested rate, it can be explained by:
A) bad monetary policy
B) discretionary fiscal policy
C) a richer version of the Taylor Rule
D) poorly informed monetary policy
E) poorly informed fiscal policy

Question

Quizplus · Accepted Answer

A richer version of the Taylor Rule can account for the deviation. The Taylor Rule is a simplified model and a richer version may include additional variables that affect the setting of the federal funds rate. Bad or poorly informed monetary or fiscal policy could lead to deviations, but the question only asks for an explanation of deviations, not the cause of them. Discretionary fiscal policy is not related to the setting of the federal funds rate in the Taylor Rule.

Assuming the Simple Taylor Rule for Dictating the Federal Funds