If the Federal Reserve Tries to Target Inflation near 2

question 104

Multiple Choice

If the Federal Reserve tries to target inflation near 2%, the inflation rate is 2.1%, and output is 4% below potential GDP, the target federal funds rate according to the Taylor rule is

• A) 0.05%.
• B) 2.1%.
• C) 2.15%.
• D) 4.15%.

---

Definitions:

Positive Betas

A term referring to financial securities that have a beta greater than zero, indicating that their returns generally move in the same direction as the market.

Zero Alphas

Situations in which an investment performs exactly as expected according to its beta, showing neither added nor diminished value.

Risk-Free Rate

The theoretical rate of return of an investment with zero risk, often represented by government bonds.

Expected Market Rate

The anticipated return that investors predict they will receive from an investment in the financial markets.