Given the Following Formula for the Taylor Rule: Target Federal

question 129

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 5% and the target rate of inflation is 2%, and output is 3% above its potential, the target federal funds rate would be:

• A)6.5%
• B)2.5%
• C)3.5%
• D)10.5%