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:

Student T-distributed

A probability distribution used in statistical analyses when the sample size is small and the population standard deviation is unknown.

Test Statistic

A calculated value from sample data used to decide whether to reject the null hypothesis in the context of a hypothesis test.

Normal Distribution

It is a probability distribution that features a symmetric alignment around the mean, emphasizing that data around the mean occur more than data at a distance.

Degrees of Freedom

The count of separate values or amounts that are capable of changing in an analysis while still respecting all limitations.