According to the Taylor Rule, If the Target Rate of Inflation

question 73

Multiple Choice

According to the Taylor rule, if the target rate of inflation for the Fed is two percent and real GDP rises by one percent above potential GDP, then the Fed should:

• A) Raise the real federal funds rate by one percentage point
• B) Lower the real federal funds rate by one percentage point
• C) Raise the real federal funds rate by half of a percentage point
• D) Lower the real federal funds rate by half of a percentage point

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Definitions:

Inaccurate Estimates

Faulty calculations or judgments about the magnitude or frequency of a particular event or phenomenon.

Short Run

A time period in economic analysis during which at least one input is fixed, affecting the operation of firms and markets.

Farms

Land and the buildings on it used for the cultivation of crops and rearing of animals to produce food, wool, and other products.

Price

The cost needed to buy a product or service, usually set by the interplay of supply and demand.