The Taylor Rule Can Be Written as FF Rate = $\pi$

question 51

Multiple Choice

The Taylor rule can be written as FF rate = $\pi$ + 2.0 + 0.5 ( $\pi$ - 2.0) + 0.5(GDP gap) , where FF rate is the nominal federal funds rate, $\pi$ is the inflation rate, and the GDP gap is the percentage deviation of real GDP from its natural level. If inflation is 4 percent and the GDP gap is 2 percent, then according to the Taylor rule, the Fed should set the nominal federal funds rate at _____ percent.

• A) 4
• B) 8
• C) 10
• D) 12

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Definitions:

Semicircular Arch

An arch that forms half of a circle and is often used in architectural designs.

Diameter

A straight line segment passing through the center of a circle or sphere and terminating on both sides of the perimeter, effectively measuring the largest distance across the shape.

Vertex

A point where two or more curves, lines, or edges meet; in geometry, it is often used to describe a corner point of a polygon or an angle.

Parabola

A symmetrical, curved, plane curve, which is the graph of a quadratic function.