Between Approximately 2001 and 2006, the Taylor Rule Predicted the Federal

question 5

Multiple Choice

Between approximately 2001 and 2006, the Taylor rule predicted the federal funds rate was:

• A) greater than the actual federal funds rate.
• B) less than the actual federal funds rate.
• C) statistically equal to the actual federal funds rate.
• D) negatively correlated with the federal funds rate.
• E) None of these answers is correct; the Taylor rule is used to predict the natural rate of unemployment.

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Definitions:

Arbitrage Opportunities

Situations where a financial instrument, or a combination of financial instruments, can be bought and sold simultaneously in different markets to profit from price discrepancies.

Risk-Free Rate

The return on investment with no risk of financial loss, often represented by the yield on government securities.

Nonsystematic Standard Deviation

A measure of variance in a portfolio's total returns attributable to factors specific to individual securities, as opposed to the market.

Equally-Weighted Portfolio

An equally-weighted portfolio is an investment strategy that gives the same weight, or importance, to each asset in the portfolio, regardless of the size or market value of the companies.