Using the Taylor Rule, If Inflation Is 3 Percent, Desired

question 210

Multiple Choice

Using the Taylor rule, if inflation is 3 percent, desired inflation is 2 percent, and output is 2 percentage points above potential, the Fed should target a federal funds rate of:

• A)6.5.
• B)4.5.
• C)3.5.
• D)3.0.

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Definitions:

Total Variable Cost

The sum of all costs that vary with the level of output produced, such as materials and labor.

Break-Even Analysis

Technique used to examine the relationships among cost, price, revenue, and profit over different levels of production and sales to determine the break-even point.

Variable Costs

Expenses that change in proportion to the activity or volume of a business.

Substitute Products

Goods or services that can be used in place of another, offering consumers alternatives based on preference, price, or availability.