Between approximately 2001 and 2006, the Taylor rule predicted the federal funds rate was:
A) greater than the actual federal funds rate
B) less than the actual federal funds rate
C) statistically equal to the actual federal funds rate
D) negatively correlated with the federal funds rate
E) None of these answers are correct; the Taylor rule is used to predict the natural rate of unemployment.

Question

Quizplus · Accepted Answer

The Taylor rule is an equation that predicts the appropriate federal funds rate based on the deviation of actual inflation from target inflation and actual GDP from potential GDP. Between 2001 and 2006, the actual federal funds rate was higher than what the Taylor rule predicted, indicating that monetary policy was tighter than what the rule warranted.

Between Approximately 2001 and 2006, the Taylor Rule Predicted the Federal