Suppose the actual equilibrium federal funds rate is above the rate implied by a particular inflation goal. In this situation, the Taylor rule implies that

Question

Quizplus · Accepted Answer

The Taylor rule is a monetary policy rule, so the adjustment would have to come from monetary policy, i.e. increasing the federal funds rate to bring it in line with the actual equilibrium rate. This is contractionary policy. Therefore, the correct answer is D, monetary policy is contractionary.

Suppose the Actual Equilibrium Federal Funds Rate Is Above the Rate