Given the Following Formula for the Taylor Rule: Target Federal

question 5

Multiple Choice

Given the following formula for the Taylor rule: Target federal funds rate = 2 + current inflation + ½(inflation gap) +½(output gap)
Every one percent increase in the rate of inflation will:

• A)Increase the real federal funds rate by 1.5%
• B)Increase the target federal funds rate by 1.5%
• C)Increase the real federal funds rate by 0.5%
• D)Increase the target federal funds rate by 1.5% and increase the real federal funds rate by 0.5%

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