The Taylor Rule Can Be Written as FF Rate =

question 1

Multiple Choice

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

• A)2
• B)3
• C)4
• D)5

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