If the Central Bank Follows the Taylor Rule Nominal Interest

question 36

Multiple Choice

If the central bank follows the Taylor Rule nominal interest rate = .04 + α(output gap) + β (inflation rate - .03)
Where α = 0 and β = 1,then each of the following is true except

• A) the real interest rate will remain approximately one percent
• B) the central bank has a three percent inflation target
• C) the policy rule excludes any consideration of employment and/or GDP
• D) the nominal interest rate will be at least four percent
• E) in the face of one percent deflation, the central bank would cut its nominal interest rate to zero

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