John Taylor's rule for setting the federal funds rate proposes increasing the nominal federal funds rate as inflation _____ and the GDP gap _____.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases

Question

Quizplus · Accepted Answer

John Taylor's rule suggests that the federal funds rate should be increased when inflation rises and when the GDP gap (the difference between actual and potential GDP) increases, indicating an overheating economy.

John Taylor's Rule for Setting the Federal Funds Rate Proposes