Given the Following Formula for the Taylor Rule: Target Federal

question 90

Multiple Choice

Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap)
If the current rate of inflation is 4% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be:

• A)7%
• B)9%
• C)5%
• D)4.5%

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Definitions:

Producer Surplus

The difference between what producers are willing to accept for a good or service versus what they actually receive, often measured by the area above the supply curve and below the market price.

Demand Curve

A graph showing the relationship between the price of a good and the quantity of that good that buyers are willing to purchase, assuming all other factors remain constant.

Supply Curve

A graphical representation showing the relationship between the price of a good and the quantity supplied, typically upward sloping.

Producer Surplus

The mismatch between the monetary compensation producers consent to for a good or service and what they actually are paid.