According to the Taylor rule, when real GDP is below its natural level, the nominal federal funds rate should be _____, and when inflation exceeds 2 percent, the nominal federal funds rate should be _____.
A) raised; raised
B) raised; lowered
C) lowered; raised
D) lowered; lowered

Question

Quizplus · Accepted Answer

According to the Taylor rule, when real GDP is below its natural level, the nominal federal funds rate should be lowered to stimulate borrowing and investment, thereby boosting economic activity. When inflation exceeds 2 percent, the nominal federal funds rate should be raised to reduce spending and cool down the economy. Therefore, the correct option is C, which states that the nominal federal funds rate should be lowered when real GDP is below its natural level and raised when inflation exceeds 2 percent.

According to the Taylor Rule, When Real GDP Is Below