If Real GDP Is 2% Below Potential GDP, and the Inflation

question 118

Multiple Choice

If real GDP is 2% below potential GDP, and the inflation rate is 1%, then according to the Taylor rule, the Fed should make the real federal funds rate:

• A) Decrease by 1.5%
• B) Decrease by 3%
• C) Increase by 3%
• D) Decrease by 1%

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Definitions:

Variable Overhead

Refers to the manufacturing overhead costs that vary in direct proportion with production volume, such as utilities and materials used in production.

Purchases Budget

A financial plan that estimates the amount of goods a company needs to buy to meet its production and sales goals.