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

question 100

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 2 percent and GDP is at the natural rate, then according to the Taylor rule, the Fed should set the nominal federal funds rate at _____ percent.

• A) 2
• B) 3
• C) 4
• D) 5

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Definitions:

Units of Y

Quantitative measures of a variable Y, often used in economics to denote quantity or amount.

Units of X

The quantity of a particular good or service being referred to or utilized in an economic context.

Original Bundle

In economics, this refers to a specific combination of goods that a consumer initially chooses given their budget and prices.

Price Rise

An increase in the cost of goods or services, typically signifying inflation or market changes.