The Taylor rule can be written as FF rate = $\pi$ + 2.0 + 0.5 ( $\pi$- 2.0) + 0.5(GDP gap), where FF rate is the nominal federal funds rate, $\pi$ is the inflation rate, and the GDP gap is the percentage deviation of real GDP from its natural level. If inflation is 2 percent and GDP is at the natural rate, then according to the Taylor rule, the Fed should set the nominal federal funds rate at _____ percent. A) 2 B) 3 C) 4 D) 5

Question

Quizplus · Accepted Answer

According to the Taylor rule, if inflation is 2% and GDP is at its natural rate, the FF rate = 2.0 + 0.5(2 - 2) + 0.5(0) = 4%.

The Taylor Rule Can Be Written as FF Rate = π\piπ

The Taylor Rule Can Be Written as FF Rate = $\pi$