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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Definitions:

Break-even Point

The level of sales at which total revenues equal total costs, resulting in no profit or loss and marking the threshold for profitability.

Variable Cost

Expenses that change in proportion to the activity of a business, such as costs for raw materials or production volume.

Fixed Costs

Expenses that remain constant regardless of the amount of goods produced or sold, including lease payments, wages, and insurance premiums.

Break-even Point

The level of production or sales at which total revenues equal total expenses, resulting in no net gain or loss.