Suppose That the Fed Has Decided to Utilize the Taylor

question 323

Multiple Choice

Suppose that the Fed has decided to utilize the Taylor rule to implement monetary policy. If the actual federal funds rate target is presently below the level specified by the Taylor rule and has been lower than this level for several weeks, then this would be a signal that

• A) monetary policy is very expansionary.
• B) monetary policy is very contractionary.
• C) the Fed should halt efforts to target the money supply.
• D) the Fed should switch to targeting the money supply instead of the federal funds rate.

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Definitions:

Nominal Interest Rates

The stated rate of interest on a loan or investment, not adjusted for inflation.

CPI

Consumer Price Index, a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Nominal Interest Rate

The interest rate before adjustments for inflation, reflecting the rate at which money can be borrowed or invested.

Real Interest Rate

The interest rate adjusted for inflation, more accurately reflecting the true cost of borrowing or the true yield on savings.