Suppose the Economy Is Thought to Be 1 Percent Below

question 41

Multiple Choice

Suppose the economy is thought to be 1 percent below its potential output (i.e., the output gap is −1 percent) .The potential output is growing at 4% a year.Suppose the Fed is following the Taylor rule, with an inflation rate of 4 percent over the past year.The equilibrium real fed funds rate is 3 percent, the weight on the output gap is 0.75 and the weigh on the inflation gap is 0.25.The inflation target is 1 percent.What should the federal funds rate be?

• A)7 percent
• B)8 percent
• C)9 percent
• D)10 percent

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