Suppose That Real GDP Falls to 2 Percent Below Potential

question 83

Multiple Choice

Suppose that real GDP falls to 2 percent below potential GDP.Then,according to the Taylor rule,the Fed should reduce the federal funds,relative to the current rate of inflation,by:

• A) ½ percentage point.
• B) 1 percentage point.
• C) 2 percentage points.
• D) 4 percentage points.

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Definitions:

Comparative Advantage

The ability of a country or entity to produce a good or service at a lower opportunity cost than others.

Opportunity Costs

The decline of potential rewards from different options as a result of choosing one.

Labor Skills

The abilities and expertise that workers possess, which can affect their productivity, efficiency, and the quality of work produced.