Suppose a Country Has an Inflation Rate = 4%; Target

question 171

Multiple Choice

Suppose a country has an inflation rate = 4%; target inflation rate = 2%; current federal funds rate = 3%; current GDP is 4% below full-employment GDP. Which statement correctly describes monetary policy actions that would be recommended according to inflation targeting and the Taylor rule?

• A) Inflation targeting would recommend contractionary policy; the Taylor rule would recommend contractionary policy.
• B) Inflation targeting would recommend contractionary policy; the Taylor rule would recommend expansionary policy.
• C) Inflation targeting would recommend expansionary policy; the Taylor rule would recommend expansionary policy.
• D) Inflation targeting would recommend expansionary policy; the Taylor rule would recommend contractionary policy.

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Definitions:

Value Increase

Refers to the rise in worth or price of assets, investments, or goods over time.

Black-Scholes

A mathematical model of a financial market containing derivative investment instruments, primarily used for pricing European call and put options.

European Options

Financial derivatives that give the holder the right, but not the obligation, to buy or sell an asset at a specified price on a specified expiration date, unlike American options, which can be exercised at any time before expiry.

Pricing Model

A method or algorithm used to determine the selling price of a product or service, taking into account costs, market conditions, and profit margins.