Using the simple monetary rule, if the inflation rate is 2 percent below the target inflation rate and the marginal product of capital is 1 percent, the Federal Reserve will:
A) lower the target rate by 2 percent.
B) raise the interest rate by 1 percent.
C) lower the interest rate by 1 percent.
D) lower the discount rate by 1 percent.
E) Not enough information is given.

Question

Quizplus · Accepted Answer

The simple monetary rule, such as the Taylor Rule, requires information on the target inflation rate, the actual inflation rate, and the output gap to determine the appropriate interest rate adjustment. The marginal product of capital alone is not sufficient to determine the Federal Reserve's action.

Using the Simple Monetary Rule, If the Inflation Rate Is