Which of the Following Correctly Represents the Taylor Rule

question 91

Multiple Choice

Which of the following correctly represents the Taylor rule?

• A) i = Π + i* + a(Π - Π*) / b (GDP - GDP*), where Π is the inflation rate, Π* is the target inflation rate, GDP* is the potential GDP, and i* is the real interest rate.
• B) i = Π + i* + a(Π - Π*) + b (GDP - GDP*), where Π is the inflation rate, Π* is the target inflation
• C) i = Π + i* + a(Π - Π*) - b (GDP - GDP*), where Π is the inflation rate, Π* is the target inflation rate, GDP* is the potential GDP, and i* is the real interest rate.
• D) i = Π + i* + a(Π - Π*) * b (GDP - GDP*), where Π is the inflation rate, Π* is the target inflation

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Definitions:

Constant Growth Stocks

Stocks of companies expected to grow at a steady, predictable rate, often used in the Gordon Growth Model for valuation.

Required Rate

The minimum annual percentage return on an investment that an investor aims for, considering the investment's risk.

Retaining Earnings

Profits that a company reinvests in itself instead of paying out to shareholders as dividends.

Flotation Costs

Those costs occurring when a company issues a new security, including fees to an investment banker and legal fees.