According to the Taylor rule, the Fed should:
A)lower the fed funds rate by 0.5% if RGDP increases 1.0% over potential GDP.
B)raise the fed funds rate by 0.5% if RGDP increases 1.0% over potential GDP.
C)raise the fed funds rate by 1.0% if RGDP increases 0.5% over potential GDP.
D)raise the fed funds rate by 2.0% if RGDP increases 0.5% over potential GDP.

Question

According to the Taylor rule, the Fed should:
A)​lower the fed funds rate by 0.5% if RGDP increases 1.0% over potential GDP.
B)​raise the fed funds rate by 0.5% if RGDP increases 1.0% over potential GDP.
C)​raise the fed funds rate by 1.0% if RGDP increases 0.5% over potential GDP.
D)​raise the fed funds rate by 2.0% if RGDP increases 0.5% over potential GDP.

Quizplus · Accepted Answer

According to the Taylor rule, when real GDP exceeds potential GDP, the Fed should raise the federal funds rate. The rule suggests that the federal funds rate should be increased by 0.5% for every 1 percentage point increase in real GDP above potential GDP. So, if RGDP increases 1.0% over potential GDP, the Fed should raise the fed funds rate by 0.5%.

According to the Taylor Rule, the Fed Should