Suppose the Inflation Rate Is 3 Percent and the Output

question 94

Multiple Choice

Suppose the inflation rate is 3 percent and the output gap is -1 percent. Assuming the equilibrium real interest rate is 2 percent, using the Taylor rule, what target should the Fed set for the federal funds rate?

• A) 1 percent
• B) 6 percent
• C) 5 percent
• D) 4 percent

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Definitions:

Year-End Assets

The total value of all assets that a company or individual owns at the end of a fiscal year.

Liabilities

Financial obligations or debts owed by a person or business to others, required to be repaid over time.

Operating Expense Fee

Fees charged by mutual funds and investment companies for the cost of managing the fund, including administrative and management services.

Front-End Load Fee

A charge applied at the time of purchase of an investment, typically pertaining to mutual funds.