According to the Taylor rule, if the target rate of inflation for the Fed is two percent and real GDP rises by one percent above potential GDP, then the Fed should:
A) Raise the real federal funds rate by one percentage point
B) Lower the real federal funds rate by one percentage point
C) Raise the real federal funds rate by half of a percentage point
D) Lower the real federal funds rate by half of a percentage point

Question

Quizplus · Accepted Answer

The Taylor rule suggests adjusting the federal funds rate based on deviations of actual inflation from the target and real GDP from potential GDP. A 1% rise in GDP above potential typically calls for a 0.5% increase in the rate.

According to the Taylor Rule, If the Target Rate of Inflation