According to the Taylor rule ________.
A)expectations are formed in an adaptive fashion
B)the central bank should set its federal funds rate target by a formula that puts weight on both output and inflation gaps
C)a constant growth rate rule for money should be adopted
D)expectations should be formed consistent with the model of rational expectations

Question

Quizplus · Accepted Answer

The Taylor rule suggests that the central bank should set its federal funds rate target by a formula that puts weight on both output and inflation gaps. This rule was developed by economist John Taylor to guide central banks in their monetary policy decisions. It is based on the principle that as inflation rises, the central bank should increase interest rates, and as inflation falls, the central bank should lower interest rates. The rule puts weight on both inflation and output, aiming to stabilize both variables in the economy.

According to the Taylor Rule ________