Suppose the Fed Has Set the Federal Funds Rate at 4.5

question 35

Multiple Choice

Suppose the Fed has set the federal funds rate at 4.5 percent using the Taylor rule.If the inflation rate increases by 1 percentage point and the weight on inflation gap is 0.5, all other variables remain unchanged, the federal funds rate should

• A)decrease to 3.5 percent.
• B)decrease to 4 percent.
• C)increase to 5.5 percent.
• D)increase to 5 percent.

---

Definitions:

Cash Outlay

The actual amount of cash spent by a business or individual for a specific purpose, including expenses, investments, and acquisitions.

Present Value Index

An investment appraisal tool that compares the present value of net cash inflows generated by a project to the present value of cash outflows, indicating the profitability.

Net Cash Flow

The difference between a company’s cash inflows and outflows in a given period, indicating the company's ability to generate cash.

Amount to Be Invested

The total sum of money dedicated to a particular investment or project.