If Output Falls 1

question 220

Multiple Choice

If output falls 1.0 percentage point below its potential, the Taylor rule predicts that the Fed should:

• A)reduce the federal funds rate by 0.5 percentage points.
• B)reduce the federal funds rate by 1.0 percentage points.
• C)raise the federal funds rate by 1.5 percentage points.
• D)raise the federal funds rate by 1.0 percentage points.

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Definitions:

Deposits

Money placed into a financial institution for safekeeping, which can earn interest over time.

Loans

Funds borrowed that are expected to be paid back with interest.

Required Reserves

The fraction of deposits that banks are obligated to hold in reserve and not lend out, as mandated by the central bank.

Reserve Requirement

The fraction of deposits that banks are required to hold in reserve and not lend out, which is used by central banks as a tool to control the money supply.