Given the Following Formula for the Taylor Rule: Target Federal

question 98

Multiple Choice

Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap)
If output in the economy were to fall by an additional one percent below potential, the target federal funds rate would:

• A)Increase by 1.5%
• B)Decrease by 1.5%
• C)Remain at 2.5%
• D)Decrease by 0.5%

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