Using the Taylor Rule, If Inflation Is 1 Percent, Desired

question 166

Multiple Choice

Using the Taylor rule, if inflation is 1 percent, desired inflation is 2 percent, and output is 2 percentage points below potential, the Fed should target a federal funds rate of:

• A)6.5.
• B)4.5.
• C)2.5.
• D)1.5.

---

Definitions:

Processing

The action of performing a series of mechanical or chemical operations on something in order to change or preserve it.

Clearing

The process of reconciling purchases and sales of various options, futures, or securities, and the direct transfer of funds from one financial institution to another.

Net Float

The difference between checks written against and deposited in an account, before those checks have been cleared and settled.

Money Market Securities

are short-term financial instruments, such as treasury bills and commercial paper, that provide liquidity and relatively low risk.