According to the Taylor Rule, When Real GDP Is at Its

question 177

Multiple Choice

According to the Taylor rule, when real GDP is at its potential and inflation is at its target rate of 2 percent, the Fed should

• A)carefully lower the federal funds rate in an attempt to stimulate noninflationary real GDP growth.
• B)raise the federal funds rate in an attempt to eliminate the remaining inflation.
• C)lower the federal funds rate to lower borrowing costs for the federal government.
• D)keep the federal funds rate at 4 percent.

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Definitions:

Interest Rate

Interest payments expressed as a percentage of the loan.

Investment

The allocation of resources, usually financial, to generate income or profit over time.

Physical Capital

Tangible assets used in the production of goods and services, such as machinery, buildings, and equipment.

Future Goods

Products or services that are not yet manufactured or provided but are planned for future sale.