The Taylor Rule Can Be Written as FF Rate =

question 43

Multiple Choice

The Taylor rule can be written as FF rate = inflation + 2.0 + 0.5 (inflation - 2.0) + 0.5 (GDP gap) , where FF rate is the nominal federal funds rate and the GDP gap is the percentage deviation of real GDP from its natural level. If inflation is 4 percent and the GDP gap is 2 percent, then according to the Taylor rule, the Fed should set the nominal federal funds rate at percent.

• A)4
• B)8
• C)10
• D)12

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