The Taylor Rule

question 158

Multiple Choice

The Taylor rule

• A) focuses on only fluctuations in real GDP.
• B) ignores price level stability to focus on responding to fluctuations in real GDP.
• C) is the rule actually followed by the Fed.
• D) shows how the Fed could set the federal funds rate.

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Definitions:

Effective Interest Rate

The actual interest rate when compounding is accounted for, expressed as an annual rate.

Lender

An individual, a financial institution, or an entity that provides funds to another with the expectation that the funds will be repaid, usually with interest.

Borrowers

Individuals or entities that receive funds from a lender under the condition of returning it over time, typically with interest.

Effective Rate of Interest

The real rate of interest earned or paid over a period, considering compounding.