Suppose the Equilibrium Real Overnight Interest Rate Is 5 Percent

question 12

Multiple Choice

Suppose the equilibrium real overnight interest rate is 5 percent, the target rate of inflation is 3 percent, the current inflation rate is 5 percent, and real GDP is 4 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the overnight interest target rate equals

• A)1 percent.
• B)5 percent.
• C)9 percent.
• D)13 percent.
• E)17 percent.

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