Suppose That the Inflation Rate Is 3 Percent and the Output

question 21

Multiple Choice

Suppose that the inflation rate is 3 percent and the output gap is -1 percent. Assuming that the equilibrium real interest rate is 2 percent, what target should the Fed set for the federal funds rate, if the Taylor rule is used?

• A) 5 percent
• B) 6 percent
• C) 4 percent
• D) 1 percent

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Definitions:

Demand Function

A mathematical expression describing the relationship between the quantity demanded of a good and factors that influence it, such as price, income, and prices of related goods.

Mead

An alcoholic beverage created by fermenting honey with water, and sometimes with various fruits, spices, grains, or hops.

Price

The expected price in currency, required, or given for a good or service.

Utility Function

A utility function is a mathematical representation of how different goods or bundles of goods satisfy a consumer's needs and preferences.